Skandia America case (C-7/13, 17 September 2014)

September 26: The Court of Justice of the European Union (CJEU) recently issued a judgment in a case that may have implications for multinational entities with either head office or branch operations in EU Member States—particularly those entities in the financial services sector that are not often able to recover value added tax (VAT) incurred on cross-border services.

The CJEU judgment in the Skandia America case (C-7/13, 17 September 2014) concludes that the “VAT disregard” rule (i.e., whether the inclusion of a branch in a VAT group affects the VAT treatment to be applied to services provided between head offices and their branches) that generally applies to such services, did not apply when the branch forms part of a VAT group.

Background
Skandia was the global purchasing company established in the U.S. and was responsible for procuring IT services for the wider Skandia group. It carried out its activities in Sweden through its branch, Skandia Sverige. Skandia Sverige has, since 11 July 2007, been registered for VAT in Sweden as a member of a VAT group. Skandia Sverige was responsible for producing an IT platform using the bought in services and then supplying the platform to various companies in the Skandia corporate group some of which were in the Swedish VAT group.

The Judgment

The Court has decided that, where an establishment of a legal entity joins a VAT group, then the disregard in respect of services provided from a head office to a branch will no longer apply. This is on the basis that it is the taxable person who receives the supply is the VAT group and not the branch. This significantly narrows the benefits of the judgment in FCE Bank.

The Court confirmed that the FCE Bank judgment applies where the branch is a taxable person in its own right and that services provided from a Head Office to a branch continue to be disregarded where the branch is registered for VAT in its own name. However, the Court decided that once a branch joins a VAT group then for VAT purposes any services provided by a third party (including an establishment of a legal entity which is outside of the VAT group) to a member of the VAT group must be considered as being made not to the member but to the VAT group.

Therefore, for VAT purposes, the services are no longer provided to the branch with the effect that they can no longer be disregarded.
The Court also concluded that the services being supplied fell within Article 56 (now Article 44) and therefore were taxed where the recipient was established.

Where will this decision be important?
This decision will be of particular importance to taxpayers in those EU Member States which both:
 allow VAT grouping; and
 treat supplies between establishments of the same entity as
outside the scope of VAT, irrespective of whether a particular establishment is a member of a VAT group or not.
Impact assessment – selected EU Member States
UK, Ireland and the Netherlands
In comparison to the majority of EU Member States, these jurisdictions have implemented relatively wider VAT grouping rules. In these countries it is accepted that:
 overseas establishments of a VAT group members are also members of a VAT group;
 services supplied between VAT group members are outside the scope of VAT; and
 services supplied by overseas establishments to the local establishment (which is part of a VAT group) are outside the scope of VAT.

The Skandia case will clearly have scope to materially impact on current VAT policy in each of these countries and taxpayers will eagerly be awaiting responses from the relevant local Tax Authority. The case will be subject to local interpretation and application but the headline position is that the Skandia case raises the strong possibility of adverse consequences for financial services taxpayers in these Member States (as it could lead to increased amounts of irrecoverable VAT being incurred).

Taxpayers may also want to explore whether the Skandia case will allow VAT groups to recover additional amounts of input VAT where supplies are made to overseas establishments of VAT group members.

If a Member State wishes to hold onto its current application of the VAT grouping rules it may wish to distinguish its circumstances from those of that in the Skandia case by reference to the fact that its VAT group includes establishments which are outside its jurisdiction. Accordingly, any supply from such an establishment should be an intra-VAT group supply and should therefore be disregarded. We will keep a watching brief to see if the relevant Tax Authorities take advantage of this argument.

Germany
Germany’s current VAT grouping rules include all entities (irrespective of location) which are bound by close financial, organizational and economic links. However, the effect of treating services as not VATable within the VAT group is limited to services between those entities / parts of entities that are established in Germany. Thus, supplies between a head office and branch of an entity within the German VAT group will benefit from the FCE Bank principles and be treated as outside the scope of German VAT.

Going forward, it is expected that (subject to the German Tax Authorities coming out with different guidance) services supplied from overseas establishments of an entity to a German establishment which is also part of a German VAT Group will be subject to reverse charge VAT (where VAT exemption does not apply to the services in question) which is likely to lead to increased amounts of irrecoverable VAT being incurred.

Sweden
In Sweden, VAT grouping can only apply to Swedish resident companies and local establishments of overseas companies. Therefore, overseas establishments of a Swedish VAT grouped
company do not form part of the VAT group unlike in Ireland, the Netherlands and the UK. Going forward, these services will be subject to

Swedish reverse charge VAT (where VAT exemption does not apply to the services in question) which is likely to lead to increased amounts of irrecoverable VAT being incurred. To reduce the burden of increased irrecoverable VAT, there may be opportunities for VAT groups to recover additional amounts of input VAT where supplies are made to overseas establishments of VAT group members.

Belgium
Under current Belgian VAT rules, reverse charge Belgian VAT is due in respect of services (which do not qualify for VAT exemption) performed between a head-office and its Belgian branch when the Belgian branch is part of a VAT group. As a result, the
Skandia case confirms the current VAT treatment applied.

France, Luxembourg, Italy and Spain
The Skandia case should have no direct impact as these countries either do not permit VAT grouping or only apply it in a very limited sense (for instance, supplies between members of a VAT group are not disregarded). However, what is not clear at this stage is whether this will have further indirect implications – this will only become apparent in due course.

Other countries
While this Alert has focused on the implications in selected EU Member States, there could also be implications arising in other EU Member States and non-EU jurisdictions whose VAT / GST systems are based on European principles.

Pan-European implications: Skandia America Corporation judgment