On November 18, 2020, the ECJ issued his judgment in C-77/19 (Kaplan International Colleges UK Ltd) on the Exemption of supplies of services made by independent groups of persons to their members. ECJ has ruled that the exemption of supplies of services made by independent groups of persons to their members is not applicable to supplies of services made by an independent group of persons to a VAT group, where not all the members of that latter group are members of that independent group of persons.
Article in the VAT Directive
Article 132(1)(f) of Council Directive 2006/112/EC
Article 132
1. Member States shall exempt the following transactions:
(f) the supply of services by independent groups of persons, who are carrying on an activity which is exempt from VAT or in relation to which they are not
taxable persons, for the purpose of rendering their members the services directly necessary for the exercise of that activity, where those groups merely claim from their members exact reimbursement of their share of the joint expenses, provided that such exemption is not likely to cause distortion of competition;
Facts
A UK referral asking whether the territorial scope of Article 132(1)(f) of the VAT Directive extends to a Cost Sharing Group (CSG) which is established outside the EU and how should the criterion that the exemption ‘should not be likely to cause distortion of competition’ be applied?
Questions
What is the territorial scope of the exemption contained in Article 132(1)(f) of Council Directive 2006/112/EC1 ? In particular (i) does it extend to a Costs Sharing Group (CSG) which is established in a Member State other than the Member State or Member States of the members of the CSG? And if so, (ii) does it also extend to a CSG which is established outside of the EU?
If the CSG exemption is in principle available to an entity established in a different Member State from one or more members of the CSG and also to a CSG established outside the EU, how should the criterion that the exemption should not be likely to cause distortion of competition be applied? In particular,
Does it apply to potential distortion which affects other recipients of similar services which are not members of the CSG or does it only apply to potential distortion which affects potential alternative providers of services to the CSG’s members?
If it applies only to other recipients, can there be a real possibility of distortion if other recipients who are not members of the CSG are able either to apply to join the CSG in question, or to set up their own CSG to obtain similar services, or to obtain equivalent VAT savings by other methods (such as by setting up a branch in the Member State or third stat in question).
If it applies only to other providers, is the real possibility of distortion to be assessed by determining whether the CSG is assured of keeping its member’s custom, irrespective of the availability of the VAT exemption – and therefore to be assessed by reference to the access of alternative providers to the national market in which the members of the CSG are established? If so, does it matter whether the CSG is assured of keeping its members’ custom because they are part of the same corporate group.
Should potential distortion be assessed at a national level in relation to alternative providers in the third state where the CSG is established?
Does the tax authority in the EU which administers the VAT Directive bear an evidential burden to establish the likelihood of distortion?
Is it necessary for the tax authority in the EU to commission specific expert evaluation of the market of the third state where the CSG is established?
Can the presence of a real possibility of distortion be established by the identification of a commercial market in the third state?
Can the CSG exemption apply in the circumstances of this case where the members of the CSG are linked to one another by economic, financial or organisational relationships?
Can the CSG exemption apply in circumstances where the members have formed a VAT group, which is a single taxable person? Does it make a difference if, KIC, the representative member to whom (as a matter of national law) the services are supplied, is not a member of the CSG? And, if it does make a difference, is this difference eliminated by national law stipulating that the representative member possesses the characteristics and status of the members of the CSG for the purpose of applying the CSG exemption?
AG Opinion
(1) The exemption in Article 132(1)(f) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’) does not extend to a group which is established in a third state.
(2) Article 132(1)(f) of the VAT Directive is to be interpreted to the effect that the exemption of services supplied by a group to its members in return for exact reimbursement of their share of the expenses does not, in principle, cause distortion of competition unless it is applied inappropriately.
Indications of inappropriate use may be, for example:
(1) that the group supplies the same services to a significant extent for consideration to non-members and is to that extent operating on the market primarily as a competitor and less as a cooperative group;
(2) that the group does not supply any services tailored to the specific needs of its members, but only passes on purchased services; or
(3) that the primary purpose of the group’s formation is simply to optimise the input VAT burden rather than to establish reciprocal cooperation with a view to avoiding a competitive disadvantage.
The tax authority bears the burden of proof for demonstrating these indications. It is not, however, required by EU law to commission a specific expert evaluation or similar. The referring court must ultimately assess these indications.
(3) The fact that some members of the CSG are also part of a VAT group does not preclude the application of the exemption in Article 132(1)(f) of the VAT Directive. However, the more extensive group taxation on the basis of Article 11 of the VAT Directive prevails. The exemption in Article 132(1)(f) of the VAT Directive does not therefore apply where all the members of the CSG are part of a single VAT group.
Decision
Article 132(1)(f) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2008/8/EC of 12 February 2008, must be interpreted as meaning that the exemption laid down in that provision is not applicable to supplies of services made by an independent group of persons to a group of persons that may be regarded as a single taxable person, within the meaning of Article 11 of that directive, where not all the members of that latter group are members of that independent group of persons. The existence of provisions of national law which require that the representative member of such a group of persons possess the characteristics and status of the members of the independent group of persons concerned, for the purposes of application of the exemption for independent groups of persons, has no bearing in that regard.
Source
Other
- VAT Committee on the Skandia America (C-7/13) case
- ECJ cases C-7/13 (Skandia) – Judgment – Supply of services between head office and branch part of VAT group constitutes a taxable transaction
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