There has been a very interesting new referral to the Court of Justice of the European Union (CJEU) concerning the VAT recovery position relating to the provision of cross-border services. The referral is from the Swedish Supreme Administrative Court and the question addresses whether the taxpayer has the right to deduct input tax in the context of a mismatch by two EU Member States in the implementation of the fund management VAT exemption. It is a referral of special importance to those in the financial services industry, particularly in situations involving an ‘arbitrage’ of tax rules, but arguably to funds more generally.

Background

The TellusTax Advisory (T-96/26) case concerns the extent to which a taxpayer is entitled to input tax recovery for the provision of services to an overseas recipient. In summary:

• Tellus supplied transaction restructuring services to a Luxembourg special purpose vehicle.
• As the recipient was located outside Sweden, the services were not subject to Swedish VAT, however, had the services been provided to a Swedish recipient they would have been taxable.  
• In Luxembourg, by contrast, the services in question qualified for the VAT exemption for fund management services, and therefore no reverse charge VAT was due by the Luxembourg recipient. This is in line with article 135(1)(g) of the Principal VAT Directive (PVD).
• The net result was that VAT was not charged in either Sweden or Luxembourg.  
• Tellus claimed input tax deduction in Sweden on the costs attributed to its services on the basis that the equivalent services, if supplied locally, would have been taxable.
• The Swedish tax authorities denied such input tax deduction and the matter has been referred to the CJEU for guidance.

Question referred

The Swedish tax authorities’ position is that VAT recovery is only possible where the underlying outbound service is taxable in both Member States. This relies on the CJEU’s interpretation of article 169(a) of the PVD as set out in the Morgan Stanley (C-165/17) judgment, sometimes known as the ‘double layer test’.  

More specifically, the CJEU is asked to consider:

“Is it compatible with Articles 168(a) and 169(a) of the VAT Directive to refuse to deduct input tax in respect of expenditure incurred by a taxable person in one Member State in connection with the supply of services to a taxable person in another Member State on the ground that the transaction is not taxable in that other Member State when it would have been taxable in the first Member State, where the differences in taxation are the result of the way in which the Member States have transposed the exemption in Article 135(1)(g) of the VAT Directive?”

Implications

It will be particularly interesting to see if the CJEU chooses to adapt the arguably very fact specific Morgan Stanley decision in interpretating article 169(a) PVD, the wording of which appears clear, with no reference to the ‘double layer test’. Morgan Stanley related to head office/branch supplies in cross-border situations, whereas the case in question is very different as it relates to supplies of services between two separate legal entities in a cross-border context.

The CJEU’s view of the overall VAT impact of ‘arbitrage’ situations will also be of interest. It will be remembered that in RBS Deutschland (C-277/09), the CJEU ultimately held that VAT recovery was permissible in a mismatch of German and UK VAT rules on the purchase of vehicles used for leasing transactions and related rental payments. That decision confirmed that taxpayers are entitled to structure their tax affairs to obtain a tax advantage resulting from differences in implementation of PVD provisions so long as the transactions in question are not entirely artificial and serve a legitimate business purpose. Will the CJEU reach a similar view in the context of divergent treatment of supplies of fund management?

Ultimately, the case will be of particular interest to those in the financial services sector, and any supply chains within the EU where there are differences in the VAT treatment (being driven by the local interpretations of the PVD and how these are enacted into domestic legislation). This could include operators in the fund and debt management sectors or payment processing industry where there are differences in how Member States have interpreted the PVD and its VAT exemptions.

We will keep you updated with the progress of this case as it develops through the CJEU – so watch this space.