ECJ C-269/20 (Finanzamt T) – Judgment – Controlling company may be the only taxable person of a VAT group

On December 1, 2022, the ECJ issued the judgment in the case C-269/20 (Finanzamt T).

Context: Reference for a preliminary ruling – Value added tax (VAT) – VAT groups – Designation of a member of a VAT group as the taxable person – Internal supplies within the VAT group – Supplies provided by a member of a VAT group which is a national foundation governed by public law – Supplies of services carried out free of charge – Pursuit of an activity carried on in an official capacity in addition to an economic activity

Article in the EU VAT Directive

Article 4(4), 4(5), 6(2) of Sixth Council Directive 77/388/EEC

Article 11 of the EU VAT Directive 2006/112/EC (Taxable person, VAT grouping)

Article 11
After consulting the advisory committee on value added tax (hereafter, the “VAT Committee”), each Member State may regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links. A Member State exercising the option provided for in the first paragraph, may adopt any measures needed to prevent tax evasion or avoidance through the use of this provision.

Facts

The applicant is, on the one hand, a taxable person for the provision of medical care to patients and, on the other hand, not a taxable person for the training of students. The applicant is also an umbrella organization of U-GmbH that carries out cleaning work. These activities took place in both the faculty rooms intended for patient care and in rooms used for the training of students. The defendant (the tax authorities) assumed that the applicant’s companies formed one company. The defendant calculated VAT on the basis of the part of the cleaned areas falling under the government task, which was € 814.12 higher. The objection to this was rejected. The tax court at first instance upheld the appeal because there is a fiscal unity leading to the merger of the applicant as an umbrella body and U-GmbH as a corporate entity into one company. This fiscal unity also includes the applicant’s government tasks. The conditions for internal use free of charge as referred to in §3 (9a) point 2 UstG (law on turnover tax) have not been fulfilled. The defendant has appealed against this decision to the referring court.

Consideration:

The answer to the first question is very important for tax revenues in Germany, as the tax paid by the umbrella bodies in their entirety accounts for 10% of the total tax revenues from sales tax in Germany. The question also arises whether the case-law of the Court (C-515/07) relates only to the extent of the deduction of input tax, or whether it also applies in the context of an autonomous application of the Article 6 (2) b) of the Sixth Directive.

Source Minbuza.nl

Questions

Is the authorisation granted to Member States in 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 to treat as a single taxable person persons established in their territory who, while legally independent, are closely bound to one another by financial, economic and organisational links to be exercised in such a way that:

a) treatment as a single taxable person is effected through one of those persons, who is the taxable person for all of the transactions performed by those persons; or in such a way that:

b) treatment as a single taxable person must of necessity – and thus, in addition, under sufferance of substantial tax losses – lead to a VAT group separate from the persons closely bound to one another, which constitutes a fictitious entity to be set up specifically for VAT purposes?

If the correct answer to the first question is (a): does it follow from the case-law of the Court of Justice of the European Union concerning non-business purposes within the meaning of Article 6(2) 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 (judgment of the Court of Justice of the European Union of 12 February 2009 in VNLTO – C-515/07, EU:C:2009:88) that, in the case of a taxable person who

a) on the one hand, pursues an economic activity and, in so doing, provides services for consideration within the meaning of Article 2(1) 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, and

b) on the other hand, pursues at the same time an activity which is incumbent upon him in the exercise of public authority (an activity he carries on in an official capacity) and in respect of which he is not considered to be a taxable person, in accordance with Article 4(5) 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,

a service falling within the sphere of his economic activity which he provides free of charge for a purpose falling within the sphere of the activity he carries on in an official capacity is not subject to tax, in accordance with Article 6(2)(b) 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?

Source: bundesfinanzhof.de

AG Opinion

Question 1:

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 (‘the Sixth Directive’) allows that persons – who, while legally independent, are closely bound to one another by financial, economic and organisational links – may, as a VAT group, be treated as a single taxable person in relation to the obligations concerning VAT.

However, the above provision of the Sixth Directive does not preclude that each member of that VAT group continues to be an independent taxable person.

Nevertheless, the same provision of the Sixth Directive precludes national provisions stipulating that only the controlling company of the VAT group becomes the taxable person of the VAT group, whereas the other members of that group are considered as non-taxable.

Question 2:

It follows from the answer given to question 1 that it is not necessary to answer question 2. In any case, point (b) of the first sentence of Article 6(2) of that directive is inapplicable to S’s activities as a public authority, that is, its non-economic activities.

Taxlive.nl

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 turnover taxes – Common VAT system: uniform taxable assessment basis

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. Union law

is to be interpreted as follows

in the case of an entity that is the sole taxpayer of a group of persons who, although legally independent, are closely linked by mutual financial, economic and organizational ties, and which, on the one hand, carries out economic activities for which it is subject to tax, and on the other hand, activities within the framework of the performance of sovereign tasks for which it is not considered subject to VAT pursuant to Article 4 (5) of the Sixth Directive, the provision of a service in connection with this sovereign activity by a member of this group not pursuant to Article 6 (5) 2 letter b of this guideline may be taxed.

Summary

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.

Source