ECJ C-141/20 (Norddeutsche Gesellschaft für Diakonie mbH) – Judgment – VAT group: Controlling member may be the only representative of a VAT group

On December1, 2022, the ECJ issued the judgment in the case C-141/20 (Norddeutsche Gesellschaft für Diakonie mbH).

Context: Reference for a preliminary ruling – VAT – VAT groups – Designation of a member of a VAT group as the taxable person – Economic activities carried out independently – Judgment in Larentia + Minerva (C‑108/14 and C‑109/14)

Article in the EU VAT Directive

Article 4(1), 4(4), 21(1)(a), 21(3) of Sixth Council Directive (Articles 9(1), 10, 11, 193, 194, 205 of the EU VAT Directive 2006/112/EC)

Article 4 (Taxable person)

1 . ‘Taxable person’ shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.

4. The use of the word ‘independently’ in paragraph 1 shall exclude employed and other persons from the tax in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability. Subject to the consultations provided for in Article 29, each Member State may treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organizational links.

Article 21 (Liability to pay VAT)

The following shall be liable to pay value added tax :
1 . under the internal system:

( a) taxable persons who carry out taxable transactions other than those referred to in Article 9 (2 ) (e) and carried out by a taxable person resident
abroad. When the taxable transaction is effected by a taxable person resident abroad Member States may adopt arrangements whereby tax is payable by someone other than the taxable person residing abroad. Inter alia a tax representative or other person for whom the taxable transaction is carried out may be designated as such other person. The Member States may also provide that someone other than the taxable person shall be held jointly and severally liable for payment of the tax;

Facts

The applicant is a limited liability company. Its partners are A (who owns 51% of the share capital) and C e. V. (who owns 49% of the share capital). A is a public body under public law. C eV is a registered association. The applicant’s sole director in 2005 (the year at issue) was E, who was at the same time sole director of A and director-director of C eV. During an on-the-spot check at the applicant’s premises, the defendant came to the conclusion that there was no fiscal unity between the applicant and A in the year at issue, as there was no financial link between the applicant and A’s company. As the holder of 51% of the applicant’s share capital, although A had a majority interest, however, due to the provisions of the partnership agreement, it did not hold the majority of the voting rights, so that it was not in a position to direct the applicant’s decision-making. The tax court at first instance upheld the appeal subsequently lodged. This decision is the subject of an appeal on a point of law brought by the defendant before the referring court. The parties disagree whether, in the year at issue, there was a fiscal unity for turnover tax between A, as an umbrella body, and the applicant, as a subordinate entity. The tax court at first instance upheld the appeal subsequently lodged. This decision is the subject of an appeal on a point of law which the defendant brought before the referring court. The parties disagree as to whether, in the year at issue, there was a fiscal unity for turnover tax between A, as an umbrella body, and the applicant, as a subordinate entity. The tax court at first instance upheld the appeal subsequently lodged. This decision is the subject of an appeal on a point of law which the defendant brought before the referring court. The parties disagree whether, in the year at issue, there was a fiscal unity for turnover tax between A, as an umbrella body, and the applicant, as a subordinate entity.

Consideration:

Under national law, the action on a ‘revision’ would be well-founded, as there is no question of the financial link in the form of the majority of the voting rights required under the German law on turnover tax to constitute a fiscal unity. The Court has held that Article 4 (4) of Directive 77/388 is to be interpreted as precluding national legislation which reserves the possibility of forming a VAT group for entities which, through a relationship of subordination are associated with the umbrella body of this group, except where that requirement is necessary and appropriate to achieve the objective of preventing abuse or of the objective of combating tax evasion or avoidance, which must be ascertained by the referring court. The referring court has doubts whether – and if so, under what conditions – a Member State can derogate from this. It follows from the case-law of the Court that, in the year at issue, it may have been lawful, by way of derogation from the second subparagraph of Article 4 (4) of Directive 77/388, to designate a taxable person other than the VAT group for the purpose of abusive and tax fraud or avoidance. According to the referring court, it is not clear to what extent abuse and tax evasion or avoidance can be prevented by classifying a member of the VAT group as a taxable person instead of the VAT group. It is therefore doubtful whether this justification allows a deviation. If it appears from the answer of the Court to the first question referred that this is not permitted under EU law, then, according to the referring court, it is also doubtful whether an individual can rely on the national legal consequence contrary to EU law. Furthermore, in assessing whether the national condition of financial affiliation is necessary, it is not clear how strict is the standard to be used in assessing the necessity of the national derogation. Finally, according to the referring court, a question should also be referred for a preliminary ruling on the first subparagraph of Article 4 (1) and (4) of Directive 77/388, since the national approach to the reasoning for the fiscal unity is self-sufficient and could therefore be justified as an

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Questions

Is the second subparagraph of Article 4(4) in conjunction with Article 21(1)(a) and Article 21(3) of Sixth Council Directive 77/388/EEC ¹ of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes (Directive 77/388/EEC) to be interpreted as permitting a Member State to designate, instead of the VAT group (‘Organkreis’, group treated as a single entity for tax purposes), a member of the VAT group (‘Organträger’, controlling company) as the taxable person?

If question 1 is answered in the negative: Can the second subparagraph of Article 4(4) in conjunction with Article 21(1)(a) and Article 21(3) of Directive 77/388/EEC be invoked in this regard?

Must a strict or lenient standard be applied in the assessment to be carried out in accordance with paragraph 46 of the Larentia + Minerva judgment ² of the Court of Justice of 16 July 2015, C-108/14 and C-109/14 (EU:C:2015:496, paragraph 44 and 45), as to whether the requirement of financial integration contained in the first sentence of point 2 of Paragraph 2(2) of the Umsatzsteuergesetz (Law on turnover tax) constitutes a permissible measure which is necessary and appropriate for attaining the objectives seeking to prevent abusive practices or behaviour or to combat tax evasion or tax avoidance?

Are Article 4(1) and the first subparagraph of Article 4(4) of Directive 77/388/EEC to be interpreted as permitting a Member State to regard a person as not being independent within the meaning of Article 4(1) of Directive 77/388/EEC if that person is integrated into the undertaking of another undertaking (‘Organträger’, controlling company) in financial, economic and organisational terms in such a way that the controlling company is able to impose its will on the person and thus prevent the person from forming his own will, which diverges from that of the controlling company?

AG Opinion

The second subparagraph of Article 4(4) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment must be interpreted as allowing closely related persons, who are members of a VAT group, to be treated as a single taxable person for the purposes of VAT obligations.

However, that provision must be interpreted as precluding Member State legislation which designates solely the member controlling the group – which owns a majority of the voting rights and has a majority shareholding in the controlled company in the group of taxable persons – as the representative of the VAT group and the taxable person of that group, to the exclusion of the other group members.

Decision

1. Art. 4 para. 4 subpara. 2 of the Sixth Council Directive 77/388/EEC of May 17, 1977 on the harmonization of the laws of the Member States relating to sales taxes – Common VAT system: uniform taxable assessment base in the amended by Council Directive 2000/65/EC of October 17, 2000 version

is to be interpreted as follows

it does not prevent a Member State from designating the controlling entity of that group as the sole taxpayer of a group of persons who are legally independent but closely linked by mutual financial, economic and organizational links, if the latter is able to do so to be enforced among the other members of this group and provided that this provision does not create a risk of tax losses.

2. Art. 4 para. 4 subpara. 2 of the Sixth Directive 77/388 as amended by Directive 2000/65

is to be interpreted as follows

it precludes a national regulation that makes the possibility of forming a unit with the company of the controlling company a group of persons who are legally independent but closely linked through mutual financial, economic and organizational relationships subject to the condition that the controlling company has, in addition to a majority stake in this entity, a majority of the voting rights in it.

3. Art. 4 para. 4 subpara. 2 of the Sixth Directive 77/388 as amended by Directive 2000/65 in conjunction with Art. 4 Para. 1 Subpara. 1 of Directive 77/388 as amended

to interpret that

it does not allow a Member State to classify entities as non-independent if they are financially, economically and organizationally the controlling bodies of a group of persons who are legally independent but closely linked through mutual financial, economic and organizational relationships , are incorporated.

Personal comments/VATupdate

In the first place, the Court replies that there is no objection in principle to the obligations of the fiscal unity being placed with a controlling parent who can impose its will on the other members. After all, in that case there does not seem to be a different situation than if the VAT group as a whole is designated as a taxable person, because the controlling entity includes all relevant transactions in its VAT return, and there is no risk of tax loss.

For the Court, however, it goes too far to require a majority of the voting rights in all cases for the creation of a fiscal unity. The Court has previously established that subordination is not a requirement for the formation of a fiscal unity. Even if this majority of voting rights is not present, an entity may be financially intertwined with another entity. Moreover, requiring a majority of the voting rights is also not necessary to prevent fraud or abuse.

Finally, the Court ruled that the controlled entities within the German fiscal unity (the Organschaft) cannot be regarded as non-independent in relation to the controlling entity in which they are included (the Organträger). This means that these controlled entities can independently perform economic activities for consideration to other members of the fiscal unity. The Court does not make it clear whether such an independent economic activity also leads to a liability for VAT.

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