Tax alert

VAT Group – Restrictions in general or in light of the need to combat tax evasion and avoidance

Commission disavowed again by CJEU

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In a series of recent judgments, the CJEU treated the possibility for Member States to include non taxable persons within VAT groups on the one hand (see our VAT Alert of 16 April 2013 ) and to restrict the possibility of the VAT group to specific sectors on the other hand.

  1. Notions on the VAT group within the EU

    Article 11 of the VAT Directive provides that a VAT Group is possible and reads as follows:

    After consulting the advisory committee on value added tax (hereafter, the ‘VAT Committee’), each Member State may regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links.

    A Member State exercising the option provided for in the first paragraph, may adopt any measures needed to prevent tax evasion or avoidance through the use of this provision.

    The VAT group is thus a legal fiction mainly meant to:

    • achieve the VAT consolidation for its members;
    • exclude the intra-group transactions from the VAT scope.
  2. Various implementations criticized by the Commission

    Said Article 11 is an optional and rather generic provision. It is therefore implemented in various ways in the Member States that have decided to apply it.
    The Czech Republic, Finland, Ireland, the Netherlands and the UK allow both taxable persons and non taxable persons to become members of a VAT Group whereas Sweden and Finland for instance only allow operators in the financial and insurance service sector to form a VAT group.
    In a communication to the Council and the European Parliament dated 2 July 2009, the Commission expressed the following strong views against such implementations:

    An entity which is a non-taxable person […] cannot be a member of a VAT group.

    And ...

    A VAT grouping scheme needs to be open to all sectors of economic activity in the Member State which intr oduces such a scheme.[…] it is not acceptable for a VAT grouping scheme to be confined by national law to a particular sector, such as the financial or insurance sector, for example.

  3. The CJEU disagrees with the Commission… again, and again, and again

    All Member States concerned were convinced that their respective systems were in line with the VAT Directive and refused to comply with the Commission’s view. The Commission therefore lodged a series of actions and asked the CJEU to declare that these Member States have failed to fulfil their obligations under Article 11 of the VAT Directive.
    Within a few weeks, the CJEU dismissed most arguments of the Commission and confirmed the essence of the Member States’ position with a twofold reasoning (see the judgment Commission v. Ireland of 9 April 2013 commented in our former VAT Alert of 16 April 2013 and the cases of 25 April 2013 opposing the Commission to  Czech Republic, Finland, Ireland, the Netherlands, Sweden and the UK respectively).

    • Concerning the inclusion of non taxable persons
      Article 11 is clear: the expression “any person” does not preclude non taxable persons from being included within a VAT group. It is not a derogating or special provision which would need a narrow interpretation and it does not require any other condition in this respect. Moreover, despite its optional nature, it should be given an autonomous and uniform interpretation within the EU;
    • Concerning the restriction to operators of the financial and insurance sectors
      Paragraph 2 of Article 11 allows Member States to adopt any measures needed to prevent tax evasion or avoidance. According to the CJEU, the Commission failed to show convincingly that such restriction is not well founded in light of the need to combat tax evasion and avoidance.

  4. Should Belgium amend its rules and allow non taxable person to form a VAT group?

    In Belgium, only taxable persons are entitled to become members of a VAT Group (Cf. Article 1 of VAT Royal Decree n°55).
    Based upon this recent case-law, it seems obvious that this position is difficult to uphold based upon the first paragraph of Article 11 since the CJEU explicitly stated that non taxable persons could be members of a VAT Group.
    However, if Belgium convincingly asserts that the exclusion of non taxable person was duly opted for in light of the need to combat tax evasion and avoidance, as foreseen in paragraph 2 of the same provision, it may well be entitled to keep its system unchanged.