The head office of Danske Bank is established in Denmark and renders computer platform services, used by a majority of the group companies, to its Swedish branch. The head office belongs to a VAT group in Denmark whereas the Swedish branch is not part of any VAT group in Sweden. In Denmark, as it is the case in the majority of the EU Member States, only taxpayers established within the same Member State can join a VAT group.
The expenses connected with the use of the platform were charged by the Danish head office to its Swedish branch. A simplified chart of the analyzed invoicing flow is depicted below:
The Swedish branch requested an advance ruling to determine whether the services received from its Danish head office should fall within the scope of VAT and thus trigger the payment of Swedish VAT under the reverse charge mechanism.
Decision of the CJEU: "reverse-Skandia" approach confirmed
The CJEU firstly clarified that in order to determine if a branch is independent from its head office, two factors should be taken into account: the fact that the branch bears itself the economic risk arising from its business and whether the head office and/or the branch belong(s) to a VAT group under article 11 of the EU VAT Directive1.
As stated in its judgment Skandia2 released on 17 September 2014, the Court held that a branch which is not independent of the principal establishment of a foreign company, but which belongs to a VAT group in a Member State, forms a single taxable person with the members of that group, so that the services supplied to it for consideration by the principal establishment must be regarded as being made for the benefit not of the branch but of the VAT group. Accordingly, the transactions are deemed to take place between two separate taxable persons. That judgment pointed out a situation in which the branch is a member of a VAT group in Sweden and receives services from its foreign head office, while in the present case, the principal establishment belongs to a VAT group in Denmark and renders services to a foreign branch ("reverse-Skandia").
Based on the above, the supplier of the computer platform services to the Swedish branch was the Danish VAT group, instead of the Danish head office. This conclusion is also reached due to the fact that the Swedish branch cannot be a member of the Danish VAT group. As a consequence, the Danish head office and the Swedish branch cannot be considered as forming a single taxable person for VAT purposes. Hence, the supply of services should be subject to VAT as follows:
The reasoning of the CJEU is not surprising at all since it is in line with past EU guidance. For instance, the EU Commission in a communication issued in 20093 stated that "(…) all supplies of goods and services made by any of the group members for a recipient not belonging to the group are deemed to have been carried out by the group itself, not by the individual member".
In addition to that, during its 105th meeting held on 26 October 2015, the VAT Committee4 considered by a large majority, when analyzing Skandia case-law, that by joining a VAT group a head office becomes part of a new taxable person for VAT purposes. And very important, it also agreed with the same level of endorsement, that supplies of goods or services by a head office to a branch, where only one of them belongs to a VAT group or where both are members of separate VAT groups, shall constitute a taxable transactions.
Consequences in Luxembourg
In Luxembourg the VAT authorities have not yet issued any guidance in this respect. More precisely, there is only a referral to Skandia case in the bill of law5 aiming to implement the VAT group.
Therefore, it should be expected that the VAT authorities apply Skandia and Danske Bank case-law when assessing internal arrangements between a head office and its branch(es) in case one of them belong to a VAT group within the EU.
In this respect, it is important to bear in mind that Luxembourg implemented article 80 of EU VAT Directive6. Therefore, it may be considered that a foreign VAT group including a head office and a Luxembourg branch are related parties. In this case, the consideration agreed for intra-group supplies should be arm's length in the following scenarios listed by article 28.3 of the Luxembourg VAT Law7:
- the consideration received is below the open market value and the recipient has a limited input VAT recovery right in Luxembourg;
- the consideration received is below the open market value and the supplier has a limited input VAT recovery right, when the supply is exempt according to article 44 of the Luxembourg input VAT (i.e., exemptions not entitling to recover input VAT);
- the consideration paid exceeds the open market value and the supplier has limited input VAT recovery right.
In practice, it implies that these supplies might trigger a VAT leakage for a Luxembourg branch unless the supplies can benefit from a Luxembourg VAT exemption. In this respect, attention should be paid in the coming months since the review of the VAT rules for financial and insurance services initiated by the European Commission is expected before year-end. Indeed, most of the internal arrangements between a Luxembourg/local head office and its foreign/Luxembourg branch(es) concern those services since Luxembourg is a financial hub, the first one within the European Union.
An Italian head office of an insurance group, belonging to a VAT group in Italy, renders to its Luxembourg branch legal services for an amount of EUR 100. The Luxembourg branch carries out an insurance activity with local customers, so it is registered for VAT purposes in Luxembourg under the simplified regime, i.e., without any input VAT deduction right. Further to Danske bank case, it is confirmed that the supplies between a head office and its branch fall within the scope of VAT. Hence, the Luxembourg branch would have to self-assess Luxembourg VAT at 17%, which constitutes a final cost (as illustrated below).
If the Italian head office does not belong to a VAT group, the supplies to its Luxembourg branch would be disregarded for VAT purposes. In this case the Luxembourg branch would not suffer any VAT cost on the legal services received from its Italian head office.
Other important questions not yet answered by the Luxembourg VAT authorities are, for instance, whether a UK VAT group would be assimilated to a VAT group under article 11 of the EU VAT Directive after Brexit, or the VAT treatment applicable to supplies between a Luxembourg branch and another branch established in another EU Member State when their head office belongs to a VAT group set-up in a third EU Member State.
As a reversal of Skandia case, Danske Bank case impacts the internal arrangements between a head office, belonging to a VAT group, and its branch(es) established in different EU Member States. Therefore, it is highly recommended to review the consideration agreed in the framework of internal arrangements and eventually, the current transfer pricing documentation, in order to avoid adverse tax consequences. Indeed, it cannot be excluded an increased scrutiny of the internal arrangements by the Luxembourg VAT authorities now the VAT group has recently celebrated its third anniversary.
Our Transfer Pricing and VAT experts at Baker McKenzie Luxembourg can assist you to assess any potential impact of the Danske Bank judgment in your structure.
1 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax
2 Case Skandia America (USA), filial Sverige (C 7/13, EU:C:2014:2225)
3 Communication from the Commission to the Council and the European Parliament on the VAT group option provided for in Article 11 of Council Directive 2006/112/EC on the common system of value added tax, COM(2009) 325 final, dated 2 July 2009
4 Advisory committee set up to provide guidance and to promote the uniform application of the provisions of the EU VAT Directive
5 Bill of Law nr 7278
6 Please refer to our tax alert published on 8 January 2019
7 Law dated 12 February 1979 regarding Value Added Tax, as amended