CJEU: Supplies between head office as part of VAT group and foreign branch subject to VAT
The Court of Justice of the European Union (CJEU) issued its long-awaited decision in the Danske Bank case (C812/19) and clarified the relationship between a foreign branch and its head office that is part of a VAT group. Six and a half years after the Skandia judgment, it is now clear that supplies between the head office, which is a member of a VAT group in one member state, and its branch in another member state are subject to VAT. The CJEU’s decision will mainly affect the financial sector in which the combination of branches and VAT groups is not uncommon.
Danske Bank whose principal establishment is located in Denmark operated an information platform shared with its foreign branches. Expenses associated with its use were charged to, among others, its Swedish branch. The subject-matter of the dispute between the Swedish branch and the Swedish tax administration was whether services provided to the branch by the Danish head office that is a member of a VAT group can be treated as taxable supplies for VAT purposes.
The court requesting a ruling from the CJEU offered two points of view: first, Danske Bank as the principal establishment and its Swedish branch can be treated as a single taxable person if the Swedish branch is not independent from its principal establishment and, simultaneously, is not part of any grouping for VAT purposes in Sweden. This is based on Judgment C-210/04 (the FCE Bank case) in which the court held that if a branch is not independent from its principal establishment, the branch and the principal establishment must be considered a single and identical taxable person and as such, supplies in form of services between the principal establishment and its branch shall not be subject to VAT. The second point of view derives from the principles of Judgment C‑7/13 (Skandia) in which the court held that the provision of services for consideration by the principal establishment (seated in a third country) to a branch that is established in an EU member state and is part of a local VAT group is regarded a taxable supply. Services provided by a third person to a member of a VAT group must be treated as services provided to the VAT group itself. The Danske Bank case involves a mirror situation to the Skandia case, as here it was the branch that was part of a VAT group; however, the Swedish branch cannot be considered part of the VAT group, owing to territorial restrictions.
The CJEU clearly held that the conclusions of the Skandia judgment shall also apply in the reverse situation. A branch in another member state and the principal establishment of a principal who is a member of a VAT group in a home country shall be treated as separate taxable persons for VAT purposes. If the principal establishment provides services to the branch in question, these must be regarded as services provided by the VAT group and shall be subject to a VAT reverse-charge mechanism according to the nature of provided services.
After a gap of almost seven years from the Skandia judgement, the CJEU again made clear that its conclusions shall also be applied to mirror situations. To assess a VAT treatment of supplies effected between the principal establishment and its branch, it is not decisive which of the entities is part of a VAT group but whether any of them is part of it. In practice, this will mainly affect the financial sector for which the background of the Danske Bank case is typical. As the financial institutions’ entitlement to deduct VAT is usually very low, the application of VAT will be an additional expense for them.