In September 2017, the Court of Justice of the European Union (CJEU) further specified the VAT exemption applicable on the services rendered by independent groups of persons (IGPs) to their members, by releasing its decisions in Aviva, DNB Banka and Commission against Germany.
If the earlier publication of the Commission against Luxembourg case already caused quite a stir on the financial place, these decisions seem to give no other choice than urging Member States using article 132, 1, f) of the VAT Directive to find a proper alternative to IGPs or to restrict drastically its scope of application.
But what did the Court exactly decide in these cases?
Before going into details on the last released decisions, it is worth reminding how the exemption provided under article 132, 1, f) usually operates.
What is the purpose of an IGP?
Let’s take the example of three undertakings (a ManCo, a HoldCo and a Bank) located in Luxembourg, each of them necessitating to be provided with various services (respectively accounting and HR services for the ManCo; HR and IT services for the Bank).
In case the companies would provide HR, IT, accounting services to each other, without creating an IGP, as in situation 1, they will have to invoice/pay VAT on them. Based on the type of company at stake, their input VAT recovery right could also be quite limited.
A contrario, in case they would put these functions in common, by forming a “cost-sharing” or “independent group of persons”, as in situation 2, article 132, 1, f) of the Directive 2006/112/EC (VAT Directive) foresees the application of an exemption when such services are rendered by the group to its members, provided the conditions are fulfilled.
A comparison between both situations illustrated below allows the reader to understand that, in case an IGP is created, the companies should in principle benefit from economies of scale thanks to their cooperation without incurring additional VAT burden.
Besides, in some cases, members of the IGP will be able to allocate resources (staff) to the IGP. Such an allocation was usually also not bearing any VAT.
It is also worth noting that IGPs can be cross border, i.e. in situation 2, some of the companies could be located outside Luxembourg.
Without IGP [situation 1]
With IGP [situation 2]
To summarize, the VAT exemption provided by article 132, 1, f) of the VAT Directive applies to:
- The services performed by the group, independent from its members, insofar as the members carry out a VAT exempt or out of scope activity (IGP is a taxable person for VAT purposes) ;
- The goal of the exemption is that the group provides its members with services which have to be directly necessary to the exercise of their VAT exempt / out of scope activity ;
- Each member has to support the exact reimbursement of its share of the joint expenses ;
- The application of the exemption should not lead to a distortion of competition.
The implementation in national legislations of this article led to divergent interpretations among Member States and was – more than once – challenged by the European Commission, the starting point being when in 2012 the latter brought an action for failure of its obligations against Luxembourg.
What did the Court exactly rule in DNB Banka, Aviva and Commission against Germany?
Last September, further decisions brought more precisions on the scope of application of this exemption.
In DNB Banka, DNB Banka AS received services from other companies within the group (mother, sister and grand-parent companies) located in other EU countries, further to an agreement concluded between each other. Latvia asked whether article 132, 1, f) should apply in this case, insofar as it was not clear enough whether or not the companies providing such services were belonging to an IGP.
In the other case at stake, the Aviva company was providing insurance services in Europe by setting up a series of share-service centers (under the form of European economic interest groups) in several Member States of the EU, which would supply – among others – HR services, financial and accounting services. Poland questioned the correct application of a VAT exemption in such a case.
If DNB Banka specifically raised the question of the form and status of an IGP, both cases related to its cross-border character (the fact that the members could be located in different EU countries).
In parallel, the German Government made an interpretation of article 132, 1, f) which was considered to be too limitative. This is why Germany was (as Luxembourg had been before, albeit for different motives) referred to the CJEU by the European Commission.
The first two decisions allowed the CJEU to clearly state that the VAT exemption provided under article 132, 1, f) of the VAT Directive does not apply to companies active in the financial/insurance sector and shall only be used in the case of public interest activities.
Besides, it appears that the Member States wrongly interpreted the Taksatorringen judgment to justify the application of the IGP exemption to the insurance and financial sectors. As a reminder, this decision concerned an insurance association encompassing 35 small or medium-sized insurance companies. However, in the situation at stake, the CJEU did not answer the question of whether the VAT exemption entailed in article 132, 1, f) was exclusively applicable to activities in the public interest or whether it could also apply to services rendered by IGPs active in the insurance sector, leaving the door for interpretation open. This point made by the CJEU should only be used to support the fact that national authorities of a Member State do not have the right to reopen closed periods in order to use the given decisions against taxable persons.
However, in Commission against Germany, the CJEU supported the fact that the exemption should not be restricted to certain professions linked with the public interest, contrary to how the German Government made use of it (applicable only to some professions linked to the health sector).
The CJEU did not answer the other questions referred (cross border application and form), insofar as, resulting from this case-law, the exemption should not have applied at all in the first place.
What is next?
These decisions will have far reaching consequences for companies active in the financial and insurance sectors which formed an IGP further to article 132, 1, f) of the VAT Directive. As the Member States have, from the date of these decisions, the obligation to apply the CJEU’s case-law, they will be required to take all the necessary measures to comply with them.
The exemption could be given an only residual content, insofar as the activities of the members will be restricted to the ones linked with the public interest in order to be able to form an IGP benefiting from the VAT exemption.
This case-law could also lead to an increased price of the intra-group supplies of services between companies belonging to the financial and insurance sectors, insofar as VAT will be applicable on such services.
The question of finding a “viable alternative to IGPs” is now left open and requires urgent attention. Member States making use of article 132, 1, f) for IGPs active in the financial sector will have to rethink the current existing structures.
In this respect, VAT grouping seems to be a first alternative to IGPs. Each taxpayer’s situation should however be carefully examined before taking any steps towards the implementation of any alternative. The provision under article 11 of the VAT Directive, if applied in national law, might constitute a solution for domestic entities so far, as only taxable persons established in the territory of one Member State shall constitute a VAT group. As regards cross-border formations, no proper solution emerges yet.
The second alternative would lie in a modification of the VAT Directive. This however requires to reach unanimity among the Member States, and in case of (unsure) success would take much longer to be applicable.
In Luxembourg, after the release of the CJEU’s decision in the Commission against Luxembourg case earlier this year, the Government proposed to cancel the Grand-Ducal decree implementing the VAT exemption on IGPs. The current status of the situation is therefore “being processed”.
By Laurence Lhôte, Head of the VAT Department – KPMG Luxembourg.
During her career, Laurence acquired (amongst others) a deepened experience of VAT in the banking and financial sector. Laurence is member of the VAT working group in ALFI (Association Luxembourgeoise des Fonds d’investissement) and she is Chairwoman of the VAT working group at the ABBL (Association des Banques et Banquiers, Luxembourg).
The author of this article is solely responsible for the content published.