The CJEU has recently released its decision in the Danske Bank case (Case C 812/19). The court considered whether supplies of services between the principal establishment of a company in one country and a branch of that establishment located within another country must be recognised as a supply for VAT purposes because the principal establishment is in a VAT group.
Danske Bank (DB) is a company with its principal place of busines in Denmark. It carries on activities in Sweden through a branch (DBDS).
DB’s principal establishment is part of a Danish VAT group.
DBDS is not part of that, or any, VAT group. Indeed, Danish law prevents the inclusion of overseas establishments in Danish VAT groups.
DB uses a computer platform in its activities in the Scandinavian countries. The costs associated with the use of that platform by DBDS are charged by DB to DBDS.
DBDS argued that it should not be required to recognise as supplies the services that it receives from DB. As DBDS is not in a Swedish VAT group and does not carry out any independent economic activity, it argued that both DBDS and DB are in effect one and the same person. Applying the simple formulation “You cannot make a supply to yourself” any ‘internal’ service provision between one establishment of Danske and another cannot be a supply on which VAT is due.
Considering previous caselaw such as FCE Bank, the Swedish Court had previously observed that DBDS, not being independent from DB’s principal establishment and not forming part of a Swedish VAT group, meant that both DBDS and DB were the same taxable person. However, considering the CJEU’s judgment in Skandia, the Court observed that if DBDS were in a Swedish VAT group, the supplies would be treated as received not by DBDS as such but ‘by the Swedish VAT group’, treating the VAT group as a distinct legal entity. The inference being that DB’s inclusion in a Danish VAT group would have a similar consequence, i.e., the supply being considered must be viewed as made “by the Danish VAT group”, not “by DB’s Danish establishment”. On that basis it placed the matter before the CJEU for its view on the treatment of services by DB to DBDS.
The CJEU concluded that, because DB’s principal establishment is in a Danish VAT group, ‘the Danish VAT group’ must be treated as a distinct ‘taxable person’. In that context, the provision of services by DB to DBDS could not be viewed as a provision of services ‘by DB to DBDS’ and must be considered a provision of services ‘by the VAT group in Denmark to DBDS’. As a result, a supply must be recognised, the effect being that DBDS is required to recognise and declare reverse charge VAT on supplies of services which it receives from DB.
Constable Comment: Under the UK’s VAT grouping provisions, a branch or establishment must have an establishment in the UK to join a UK VAT group. However, when a VAT group is in place the whole corporate entity is part of the VAT group, not just the establishment in the UK. Therefore, services provided between an overseas establishment and a UK establishment of the body (within a VAT group) are not normally regarded as supplies for UK VAT purposes, as they are transactions within the same taxable person. [There are some targeted anti-avoidance rules which we have not referenced.]
The main oddity of the CJEU’s Danske judgement is that it means that it is necessary to ‘import’ the rules of an overseas jurisdiction in assessing domestic VAT liabilities.
Had Danske’s principal establishment not been in a Danish VAT group then there would have been no recognition of a supply by DB to DBDS. So in effect the CJEU has said that Sweden must recognise the status of a company under a different country’s tax system as part of its own rules of taxation.
As far as operations entirely within the EU are concerned this recognition of a company’s status in another EU territory is perhaps justifiable and possible to implement. However, it is unclear whether this principle would or could apply when a non-EU country has granted “VAT group status”. Hypothetically any non-EU territory could confer a special status as regards the taxation of supplies within a group of countries. Is it then necessary to import that non-EU country’s ‘special status’ rules when considering whether services received by an EU establishment are subject to VAT? If so, at what point are the rules of overseas tax authorities deemed to change the VAT treatment of services received by an EU establishment?
Without a common framework of rules for VAT groups within the EU we are left with a confused situation. A company operating in an EU territory that does not even allow VAT groups may find itself applying VAT to transactions based on a forced recognition of VAT group rules adopted in a different EU territory.
Please note that this blog post is intended to provide a general overview of the subject. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.