Criteria from the ECJ
In the FCE Bank case (C-210/04), the CJEU ruled that services provided by a head office to its branch are not subject to VAT as there is no supply of services for VAT purposes between a head office and its branch because they are considered to be the same taxable person.
However, over the years, the CJEU ruled, in e.g., Skandia (C-7/13) and Danske Bank (C-812/19) cases, that there may be exceptions in which such services between head offices and branches may be considered within the scope of the VAT when one of the two "parties" is part of a VAT group in a different EU member state.
Spain
The case involved a Spanish branch receiving services from its head office (i.e., recharge of costs) located in another EU member state. The branch engaged in various financial activities in Spain, including insurance operations, and used its own funds to support these activities and had its own financial account subject to the branch management's discretion.
During the tax audit, the authorities examined the autonomy of the branch, focusing on its financial independence towards its head office and the nature of the services received from its head office. The Spanish tax authorities requested various documents, including financial statements, the transfer pricing documentation and records of transactions between the head office and the branch. The audit considered that the branch operated with significant independence, justifying its treatment as a separate entity for VAT purposes.
The Spanish tax authorities raised an assessment in which they considered that the services received from the head office were within the scope of the VAT and the branch should have applied the reverse charge mechanism. As the branch was only performing VAT-exempt services in Spain, it had no right to deduct any input VAT, making this VAT an unrecoverable cost for the branch.
The Central Administrative Court fully upheld the decision taken by the Spanish tax authorities, reinforcing the criteria previously followed by the Central Administrative Court.
This criterion has been particularly enforced in industries with limited VAT deductibility. There have been precedents in these VAT-exempt industries in converting Spanish subsidiaries into branches to avoid the cost of VAT in intercompany services where there has been no substantial change in the functions and risks previously held by the former subsidiary.
The Netherlands
In the Netherlands, the Dutch State Secretary of Finance has published a decree that addresses the VAT treatment of transactions between foreign head offices and their Dutch fixed establishments, the so-called "Fixed Establishment Decree" (Besluit Omzetbelasting Vaste Inrichting). This decree describes the VAT treatment of services between a foreign head office and a Dutch fixed establishment (i.e., a branch). In that respect, the decree emphasises that — in line with CJEU case law — a head office and its foreign branch in principle qualify as a single VAT entrepreneur. Consequently, services between a foreign head office and a Dutch fixed establishment are out of scope for VAT purposes.
The decree also discusses the sole exception to the above principle, which is the case if the Dutch fixed establishment is part of a Dutch VAT group (VAT fiscal unity). The decree states that in such case, in line with the CJEU Danske Bank case, the Dutch fixed establishment and foreign head office no longer qualify as a single VAT entrepreneur. Instead, the Dutch fixed establishment qualifies as a single VAT entrepreneur together with its Dutch VAT group members. Consequently, services between the foreign head office and the Dutch VAT group of which the Dutch fixed establishment is part are considered as in-scope for VAT purposes.
As the Dutch fixed establishment decree solely addresses the CJEU case law, it is not expected that a similar situation as in Spain would occur.
Conclusions
This is a great example of how important it is to review current business structures, presence, functions, risks and assets, as well as transfer pricing and VAT documentation, incl. intercompany agreements between different entities or branches established in the EU. This is especially important for operators in VAT-exempt industries such as insurance, banks and healthcare. Even though the CJEU may appear to provide some level of comfort, practices in the EU member state may not be fully harmonized and this could risk the efficiency of the business model.
