The Court of Justice of the European Union (the 'CJEU') handed down its decision in Danske Bank A/S v Skatteverket (C-812/19) on 11 March 2021. The decision could have ramifications for businesses who are members of an Irish VAT group, who have overseas establishments.
Danske Bank A/S (‘Danske’) is a Danish bank headquartered in Copenhagen, operating in Sweden through a branch. The Swedish Court sought a ruling from the Court of Justice of the European Union (the ’CJEU’) on the question of whether the presence of Danske’s head office in a Danish VAT group means that it and its Swedish branch are to be viewed as constituting two separate taxable persons for VAT purposes.
The CJEU found that that the Danish VAT grouped head office is a separate taxable person to its Swedish branch. The relatively short judgment focused on the territorial and operational scope of the EU VAT grouping rules with the Court putting forward its view that EU VAT grouping laws “..contain a territorial limitation…that a Member State may not provide for a VAT group to include persons established in another Member State”.
Therefore, EU VAT laws permitting Member States to implement VAT grouping should be interpreted in such a way that only local establishment VAT grouping is permitted. As such the Danish head office and the Swedish branch could not be considered to be a cross-border single taxable person. Therefore, transactions between them could not be disregarded and fell to be taxed in the normal manner.
Impact on Inter-Company Transactions
This case arises from the differing ways in which Member States enacted EU VAT law into local legislation and the various ways in which Member States interpreted the Court’s 2014 judgment in Skandia (C-7/13). Ireland is one of the many Member States that has implemented VAT grouping on a ‘whole legal entity’ basis. In March 2020, Revenue reiterated their practice in this area by confirming that ‘if a person has either a fixed or business establishment in Ireland and applies to join an Irish VAT group, it is the entire person, including any overseas Head Office or Branches, that must join the Irish VAT Group’. So unlike Sweden and Denmark, Ireland does not confine the benefits of VAT grouping only to the Irish establishments of its members.
The finding that Article 11 contains a “territorial limitation” that restricts grouping to local establishments is at odds with how many Member States have interpreted the EU VAT grouping rules to date and gives rise to the risk that ultimately a supply of services from an overseas establishment to its branch or head office could fall within the reverse charge mechanism if either party is in a VAT group.
Next Steps
We expect there should be no immediate change to Revenue or other Member States’ existing practice with respect to cross-border intra-entity transactions. There are still question marks over how these rulings interact with earlier ECJ decisions in FCE Bank and Morgan Stanley.
Revenue will likely take some time to consider the full legal ramifications of the Danske judgment, to examine precisely what is meant by “territorial limitations” and the extent to which that concept might apply in Ireland. In the meantime, Irish businesses should:
It is also unclear to what extent a third country VAT group (such as a VAT group in the UK) needs to be considered by establishments in the EU when determining their own VAT position. This is a matter Revenue and the tax authority of that third country (e.g. HMRC) may comment on further in respect of local implementation of this judgment.
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