German VAT Group: Backgound and general concept
The German VAT group has the effect that legally independent companies are not to be regarded as independent taxable persons for VAT purposes under certain conditions. This is the case when companies (usually subsidiaries) are financially, economically and organizationally integrated into the so-called controlling company of the VAT group (usually the parent company). From a German VAT perspective, the controlling company is the sole taxable person for VAT purposes. In this case, the subsidiaries qualify as controlled companies, which are merely dependent parts of the controlling company. There is no statutory option to establish a VAT group for German VAT purposes.
The existence of a VAT group entails a variety of German VAT implications. In particular, only the controlling company has to submit a VAT return to the competent tax office, which includes all incoming and outgoing services of the VAT group - consisting of the controlling company and its controlled companies. In addition, transactions between the domestic members of the German VAT group qualify as mere internal transactions which are out-of-scope of German VAT. Therefore, no German VAT is due for these transactions. This can be particularly advantageous for companies that are not fully entitled to deduct input VAT amounts. For example, services outsourced to subsidiaries within a VAT group do not trigger VAT, which may not be (fully) deductible as input VAT.
In depth: ECJ decisions
1) Questions referred to the ECJ
In the past, the German Federal Tax Court - and also the ECJ - mainly dealt with details of the requirements for forming a German VAT group, i.e., the integration criteria.
In the current proceedings, however, the focus is on the question of determining the taxable person for VAT purposes in the case of the existence of a VAT group. The German Federal Tax Court therefore asked the ECJ whether it is permissible that the German VAT law determines the controlling company as the taxable person for VAT purposes or whether the VAT group itself should be regarded as the taxable person for VAT purposes.
2) The opinion of the Advocate General and its implications
The Advocate General's opinion gave the proceedings a new twist and even greater significance, which caused much attention and considerable uncertainty in practice. The Advocate General took the view that the basic concept of the German VAT group was already contrary to EC law. She argued that it was inadmissible to automatically deprive the controlled companies of their status as taxable persons - in case the integration criteria are met - so that only one taxable person for VAT purposes existed. Rather, all members of the VAT group remain independent taxable persons for VAT purposes. The VAT group therefore merely led to a "tax declaration community", in which one member of the VAT group had to submit a consolidated VAT return for the incoming and outgoing supplies of all members.
Furthermore, the Advocate General's comments could be interpreted in a way that transactions between the members of the VAT group do not constitute mere internal transactions which are out-of-scope of German VAT, but are rather subject to the general German VAT rules. The advantage of the VAT group - especially for companies with only limited input VAT deduction - would be invalidated in this view.
Against the background of these statements, hardly any other recent ECJ ruling has been awaited with such excitement.
3) ECJ decisions
In its rulings published in December 2022, the ECJ came to the following remarkable conclusions:
- 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 comments on the criterion of financial integration. According to the current view in Germany, financial integration is given in case 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. The ECJ rejects this view. Beyond the majority of the shares, the controlling company does not additionally have to hold the majority of the voting rights.
- Finally, the ECJ comes 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. However, the ECJ does not take up the Advocate General's strict view. Furthermore, the ECJ does not comment on the VAT implications if controlled companies are to be regarded as independent taxable persons for VAT purposes. In particular, the ECJ avoids statements on the VAT treatment of supplies and services between the members of a VAT group in these cases.
Possible implications and recommended actions
For reasons of legal certainty, it is positive that the ECJ confirms the German view according to which the controlling company can be determined as the taxable person of a VAT group.
Notwithstanding this, these ECJ rulings once again show that the current German VAT group provisions are in urgent need of a legal revision. This applies in particular to the "automatic" classification of controlled companies as mere dependent parts of another taxable person. Existing considerations on the legal reform of the German VAT group will therefore probably have to be readjusted.
In particular against this background, the follow-up decisions of the German Federal Tax Court are eagerly awaited. It would be desirable for the German Federal Tax Court to concretize the ECJ's conclusions and provide more clarity. This applies above all to the questions of the independence of the controlled companies and the German VAT implications of transactions between the domestic members of a VAT group.
For the past and until a new legal regulation of the German VAT group, taxpayers should be able to rely on the current national VAT regulation.