Danske Bank A/S (C-812/19) - Skandia principles reinforced, but questions raised over ‘whole legal entity’ VAT grouping rules in the EU

Background

This case arises from the different interpretations Member States have taken to the earlier decision of the CJEU in Skandia (C-7/13). In Skandia, the CJEU had held that services provided by a US company to its Swedish branch, which was a member of a Swedish VAT group, were liable to reverse charge VAT in Sweden. This was on the basis that the services were considered as being supplied to the VAT group, a separate taxable person for VAT purposes to that of the branch.

The Danske Bank case is effectively the reverse fact pattern of Skandia. In this case, Danske’s head office is a member of a Danish VAT group. Danish VAT grouping is limited to local establishments only, and does not include any non-Danish establishments of members. Danske’s head office provided services to its Swedish branch (which was not part of a Swedish VAT group) and the Swedish tax authorities held that VAT was due in Sweden under the reverse charge. 

The question referred to the CJEU concerns whether Danske’s head office and its Swedish branch are two separate taxable persons for VAT purposes due to the head office being a member of a Danish VAT group. The issue had already been considered in the FCE Bank (C-210/04) case, albeit not in the context of VAT grouping. However, post Skandia, the position was uncertain. 

The specific question referred is:

• Does a Swedish branch of a bank established in another Member State constitute an independent taxable person where the principal establishment supplies services to the branch and imputes the costs thereof to the branch, if the principal establishment is part of a VAT group in the other Member State, while the Swedish branch is not a member of any Swedish VAT group?

The CJEU's judgment

In this case, the CJEU has dispensed with an Advocate General’s Opinion.  The Court will take this step in cases where it considers there to be no new point of law to be addressed.

In short, the CJEU’s decision was largely based on the territorial and operational scope of the VAT grouping rules.

In Morgan Stanley (C-165/17), the CJEU confirmed that a branch and head office are to be treated as a single taxable person, and that absent a legal relationship between the two parties constituting a supply, any activities between the entities are non-taxable internal charges and are therefore differentiated from taxable transactions carried out by third parties.

To determine whether any legal relationship existed between the head office and branch, it was necessary to consider whether the branch carried on independent economic activity e.g. its autonomy and whether the branch bears the economic risk of its activities – see FCE Bank (C-210/04).

However, the Court did not expand on this and focused instead on the scope and effect of the VAT grouping rules regarding Member States including taxable persons established in another Member State.   

The Court found that the Skandia decision was applicable in this case.  Danske’s head office was part of a Danish VAT group, operating local establishment only VAT grouping. Therefore, for VAT purposes, the Danish head office and the Swedish branch could not be considered to be a single taxable person. As such, the transactions between them must be considered for VAT purposes and cannot be disregarded.

In issuing its judgment the CJEU also commented on the territorial scope of VAT grouping more generally. In paragraphs 24, 29 and 33 of its judgment, the CJEU put forward its view that Article 11 of Directive 2006/112/EC “..contains a territorial limitation…that a Member State may not provide for a VAT group to include persons established in another Member State”.   Whilst this decision appears to support a strict application of Skandia, there remains tension between the FCE Bank, Morgan Stanley and Skandia decisions and further litigation is therefore to be expected. 

What happens next?

The case will now return to the Swedish courts to apply the CJEU decision although it is hard to see how Danske’s case can progress.

More widely, we would expect Member States to be reviewing how they had historically implemented Skandia to confirm it is consistent with this decision.

In addition, Member States that have implemented VAT grouping on a ‘whole legal entity’ basis will need to consider whether the CJEU’s comments on how EU VAT grouping should be limited to local establishments only is in line with Article 11 of the Directive, and whether this in turn will require any changes to their local VAT grouping regimes.  

What does this mean for businesses?

The judgment applies a broad reading to the Skandia decision, and is largely based on the application of the territoriality of the VAT grouping rules.

The CJEU has confirmed that where transactions take place between establishments of the same legal entity, to analyse whether VAT implications will arise, consideration must be given to their VAT grouping status. If one or both establishments are in a VAT group that limits VAT group membership to local establishments only, then by extension they should be treated as separate taxable persons. Those transactions therefore need to be considered within the scope of VAT.

Businesses should be:

• Assessing where transactions take place within legal entities, whether any establishments of those legal entities are members of a VAT group;
• Determining the territorial scope of those VAT groups; and
• Obtaining information to identify supplies and determine the VAT liability of those, should this be necessary.

Businesses should then assess whether VAT needs to be reported in any Member State. We expect this to be the case, unless there is specific Member State law or guidance to the contrary, or the VAT grouping regime in question is a ‘whole legal entity’ grouping regime.

What does this mean for tax authorities?

We expect Member States with such ‘whole legal entity’ regimes will need to consider this judgment carefully to consider if they need to implement any changes or issue guidance to address how this judgment (with Skandia) should be dealt with under local rules.

From a UK perspective, HMRC are not compelled to consider this decision as regards their implementation of Skandia. They may however, choose to do so to clarify if, and how, UK taxpayers should treat intra-legal entity transactions from a UK VAT perspective. This will apply not only to supplies made to non-UK establishments (for UK VAT recovery and local reverse charge decisions) but also for supplies received from overseas. Businesses should continue to apply the existing UK implementation of Skandia in the meantime.

It is also unclear to what extent a third country VAT group needs to be considered by establishments in the EU when determining their own VAT position. This is a matter Member States may comment on further in respect of local implementation of this judgment.

If you would like to discuss this further, please contact one of the key contacts below or your usual Deloitte engagement team.