Background: decisions of the ECJ on the basic concept of the German VAT group
In December 2022 the ECJ published two decisions on the German VAT group, referred to the ECJ by the German Federal Tax Court. The focus of these proceedings was on the admissibility of the basic concept of the German VAT group under EC law, i.e., whether the current German VAT approach, according to which the controlling company of a VAT group is regarded as the taxable person, is in line with EC law. The ECJ ruled that:
- National law may determine the controlling company as the taxable person for VAT purposes of a VAT group. Consequently, the German VAT provisions on the VAT group are likely to be in line with EC law in this respect.
- The ECJ also commented on the criterion of financial integration. The ECJ stated that beyond the majority of the shares, the controlling company does not additionally have to hold the majority of the voting rights.
- Finally, the ECJ came to the conclusion that in the case of a VAT group, the controlled companies may not be "automatically" deprived of their status as taxable persons for VAT purposes. Thus, according to the ECJ, a core aspect of the German VAT group does not seem to be in line with EC law.
Moreover, based on the opinion of the Advocate General in the context of these decisions, it became unclear, whether the current German VAT view, according to which supplies and services between the domestic members of a German VAT group are to be regarded as mere internal transactions which are out-of-scope of German VAT, is in line with EC law. The statements of the Advocate General could be interpreted in a way that such transactions should rather be subject to the general German VAT rules. The ECJ did not comment on this aspect (please click here for our client alert commenting on the ECJ decisions regarding the German VAT group and for more detailed information on the background of the German VAT questions, the statements of the ECJ and potential implications).
As a result, the follow-up decisions of the German Federal Tax Court were highly anticipated. In particular, taxable persons hoped to gain clarity / legal certainty regarding the German VAT implications of transactions between the domestic members of a German VAT group.
In depth: German Federal Tax Court decisions and new request for a preliminary ruling
The German Federal Tax Court came to the following conclusions:
- The controlling company of a German VAT group is regarded as the taxable person for German VAT purposes. Accordingly, the controlling company is liable for the German VAT resulting from the supplies and services carried out by the members of the VAT group, i.e., including the controlled companies. Hence, as already confirmed by the ECJ the German VAT provisions are in line with EC law insofar.
- Regarding the criterion of financial integration, the German Federal Tax Court amended its previous case law. In general, the German Federal Tax Court confirmed that the current German VAT viewpoint is still valid. Accordingly, financial integration requires that the controlling company holds more than 50% of the shares in the controlled company, provided however that the shareholding ratios correspond to the voting rights ratios and / or no higher qualified majority is required for the passing of a resolution in the controlled company. Otherwise, a majority of voting rights is required. However, on the basis of the ECJ decisions financial integration is also given, if the enforcement of the controlling company's will is ensured by the fact that the controlling company has only 50% of the voting rights, but it holds a majority share in the capital of the controlled company and it provides the sole managing director of the controlled company.
The German Federal Tax Court did not come to a final conclusion with regard to the German VAT implications of supplies / services between the domestic members of a German VAT group, i.e., whether the current German VAT view, according to which such transactions are disregarded for VAT purposes, is in line with EC law. Instead, the German Federal Tax Court referred two further questions to the ECJ:
- Does the grouping of several persons into one taxable person under Article 4(4)(2) of Directive 77/388/EEC mean that supplies for consideration between those persons are not subject to the scope of value added tax?
- Are supplies for consideration between those persons in any event subject to the scope of value added tax if the recipient of the supply is not (or is only partially) entitled to deduct input VAT, since otherwise there is a risk of tax losses?
Hence, the German Federal Tax Court now explicitly requests clarification from the ECJ regarding the (German) VAT implications of "intra VAT-group transaction", which is of particular importance in practice. It is noteworthy, that the German Federal Tax Court in its request for a preliminary ruling to the ECJ states that:
- There are good arguments according to which transactions between the domestic members of a VAT group - contrary to its previous assumption and case law - are rather subject to the general German VAT rules, so that such transactions cannot be disregarded for VAT purposes and
- That in case transactions between the domestic members of a German VAT group are subject to the general German VAT rules, the current wording of the German VAT law can be interpreted in this way, so that such transactions may even under the current German VAT law not be treated as disregarded for German VAT purposes.
Recommended actions
As a result of the follow-up decisions from the German Federal Tax Court on the German VAT group, the focus is now clearly on the German VAT implications of transactions between the domestic members of the German VAT group. It is regrettable for the planning security of companies that the German Federal Tax Court has not made a decision in this respect. In view of the unclear or non-existent statements of the ECJ on this topic, it is, however, not entirely surprising that the German Federal Tax Court asks the ECJ for further guidance. It remains to be seen, whether the ECJ will make use of this opportunity.
Companies should closely observe the outcome of the new request for a preliminary ruling. In case the ECJ should rule that transactions between the domestic members of a German VAT group cannot be treated as disregarded for German VAT purposes, far reaching implications may apply. In particular, the existence of a German VAT group is currently beneficial for companies with (only) a limited input VAT recovery position. If transactions between the domestic members of a German VAT group are disregarded for German VAT purposes, no German VAT is due for these transactions, so that no irrecoverable input VAT amounts can arise. Should the ECJ reject the current German VAT view in this regard, this advantage would be invalidated.
Accordingly, in particular companies which are only entitled to partially recover input VAT amounts should conduct an impact analysis regarding potential implications in case transactions between the domestic members of a German VAT group are no longer disregarded for German VAT purposes, but are rather subject to the general German VAT provisions. Amongst others, such analysis should include a review whether the corresponding transactions could be subject to a VAT exemption.
