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VAT Case Law update - Danske Bank

In brief 

The EUCJ has handed down a further judgement concerning the VAT treatment of arrangements between the branch and head office of an entity where those establishments are in different territories, and one establishment is VAT registered within a VAT group.

In detail 

Background 

This judgement builds on the EUCJ’s judgement in Skandia (C-7/13), where it was held that a non-EU branch of a Swedish headquartered company could not disregard supplies between the branch and the Swedish head office, as that head office was itself registered as part of a Swedish VAT group. The membership of the VAT group essentially meant that the head office must be treated as a separate taxable person, from its branch, for VAT purposes and therefore Swedish VAT needed to be accounted for. In the absence of a Swedish VAT group, the supply by the branch would have been to the head office, and therefore within the same legal entity for VAT purposes, and as such would not be within the scope of VAT, following the earlier judgement in FCE Bank plc (C-210/04). 

Danske represents a further development to the Skandia principles.

Danske Bank is a company with its principal place of business in Denmark. It carries on its activity in Sweden through a branch (the Swedish branch). 

Danske Bank’s principal establishment is part of a Danish VAT group established under the Danish VAT legislation transposing part 11 Principal VAT Directive (PVD). The Swedish branch is not part of any Swedish VAT group.

Danske Bank uses a computer platform for the purposes of the activities carried on by all of its business establishments in the Scandinavian countries. The costs associated with the use of that platform by the Swedish branch for the purposes of its activities in Sweden are charged to it by Danske Bank’s principal establishment in Denmark. This is essentially the reverse of the facts considered in Skandia, as here the VAT group exists in the territory of the head office (Denmark) and the question is whether there is a supply to the overseas branch (the Swedish branch).

Judgement

In the Danske case the EUCJ has confirmed that the principle set out in the Skandia judgment must also apply where the services are supplied between a principal establishment belonging to a VAT group in one Member State (Denmark) and a branch established in another Member State (Sweden).

Danske Bank’s principal establishment is part of the Danish VAT group at issue, and so the EUCJ held, for VAT purposes, that it is the VAT group which supplies the services to the Swedish Branch. The Swedish branch is precluded from membership of the Danish VAT group, despite being part of the same legal entity as its Danish head office. As such, transactions between the Danish VAT group and the Swedish branch cannot be disregarded and must be treated as supplies for VAT purposes. The membership of a VAT group, established in line with Article 11 of the PVD, is the defining factor in the EUCJ’s conclusion that the Danish head office must be treated as a separate taxable person from its branch for VAT purposes

Implications

The outcome in this case is evolutionary rather than revolutionary, simply building on the principle established in Skandia. The EUCJ considered that the membership of a VAT group in a Member State changes the VAT status of the EU VAT group member, whether it is the principal establishment or a branch. The EU VAT group member is a separate taxable person and therefore capable, for VAT purposes, of making supplies to, or receiving supplies from, the different taxable persons in the other Member State. 

It should be noted that, in responding to the EUCJ’s decision in Skandia, Member States implemented the decision to varying degrees. Territories such as the UK, Ireland and the Netherlands were, and currently remain, of the view that VAT groups can include the overseas branches of VAT group members and as such transactions between them are disregarded as taking place within the VAT group. Those Member States consider VAT groups to extend beyond the geographical borders of their territory to encompass all establishments of members of the VAT group - i.e. they follow a ‘whole entity’ approach to VAT grouping.

The takeaway 

It remains to be seen how Member States will react to this judgement. In particular, the extent to which it will increase the pressure on Member States that follow the ‘whole entity’ approach to VAT grouping. Other questions of interpretation also remain with regards to whether this principle can be applied to VAT groups in Member States which have provisions that do not conform to the requirements of Article 11 of the PVD and, most critically in light of Brexit, the extent to which these principles apply in respect of non-EU VAT groups. 

Banking businesses with VAT groups that operate through branch structures will need to closely monitor developments in response to this judgement and may consider reviewing and updating risk assessments performed.

Contact us

Marie-Isabelle Richardin

VAT Partner, PwC Luxembourg

Tel: +352 49 48 48 3009

Frédéric Wersand

VAT Partner, PwC Luxembourg

Tel: +352 49 48 48 3111

Stéphane Rinkin

Tax Partner, PwC Luxembourg

Tel: +352 49 48 48 2044

Chantal Braquet

VAT Partner, PwC Luxembourg

Tel: +352 49 48 48 4146

David Schaefer

VAT Partner, PwC Luxembourg

Tel: +352 49 48 48 3202

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