Relief for taxpayers: the CJEU confirms that supplies within a VAT group are not taxable

With the eagerly awaited ruling in Case C-184/23 Finanzamt T II of July 11, 2024, the European Court of Justice (CJEU) has once again decided on VAT grouping and, in particular, on the taxability of intra-group supplies. This ruling was preceded by a series of rulings by the CJEU and questions referred by the German Federal Fiscal Court (BFH), which we have also commented on in previous (Latest German Federal Tax Court case  law on VAT groups, Latest CJEU case law on VAT groups).  The ball is now once again in the hands of the BFH which has the role of “bringing the matter to a close” and providing final clarity regarding the German rules on VAT groups. The CJEU has given clear instructions on how to handle this.

 

 

Background

The framework conditions of the VAT group are centrally stipulated by the EU legislator in Art. 11 of the VAT Directive. In Germany, these regulations are implemented through the construct of the so-called “Organschaft”. However, in some points, the German understanding differs considerably from the requirements of the VAT Directive. For this reason, the German understanding of VAT grouping has recently been the subject of various proceedings before the CJEU.

On December 1, 2022, the CJEU ruled in the cases Norddeutsche Gesellschaft für Diakonie (C-141/20) and Finanzamt T (C-269/20) on the one hand that the “Organschaft”, which regards the controlling company as the taxable person instead of a fictitious VAT group, is compatible with EU law.

On the other hand, the CJEU ruled that the German regulations on financial integration are not in line with EU law. Previously, such financial integration only existed if the controlling company not only held more than 50% of the shares in the controlled company, but also held a majority of the voting rights. On the basis of the CJEU ruling, the BFH decided that financial integration now already exists if the controlling company is able to assert its will, for example if a majority shareholding already exists, an additional majority of voting rights is not required.

After the CJEU had created legal certainty by answering these questions, it called into question a traditional consequence of VAT grouping. By suggesting that members of a VAT group could also continue to be independent for VAT purposes, the CJEU opened up, in the view of many legal commentators, the possibility of taxing intra-group supplies. This resulted in particular from the considerations of Advocate General Medina. Aware of the consequences that the taxability of intra-group supplies would entail, the BFH referred this question back to the CJEU, thus giving the CJEU the opportunity to clarify its statements on the taxability of intra-group supplies. This was the subject of the case Finanzamt T II (C-184/23) decided on July 11, 2024.

 

Facts of the case

The facts of the case are similar to those in the case of Finanzamt T (C-269/20, dated December 1, 2022). A foundation under public law (sponsor of a university) provided both taxable and non-taxable output transactions. This foundation was also the controlling company. The controlled company was a GmbH, which provided cleaning services in both the business and non-business areas of the foundation. This raised the question of whether the services for the non-business area were also subject to VAT.

 

Verdict

In its ruling of July 11, 2024, the CJEU now clearly states that intra-group supplies between the members of a VAT group are not taxable. This also applies if one of the participants is subject to input tax deduction restrictions. The CJEU justifies this by stating that the members of a VAT group form a single taxable person. In principle, there are therefore no changes to the legal consequences of the VAT group and the legal situation remains unchanged.

 

Future prospects

While the proceedings in the area of VAT grouping before the CJEU have now been concluded, the verdict of the BFH in this case (V R 20/22) still has to be awaited. However, due to the clear ruling of the CJEU, it can be assumed that the BFH will also maintain its view that intra-group supplies are not subject to VAT. It is to be hoped that the BFH will follow the CJEU’s ruling just as clearly and provide legal certainty. In particular, companies that are not entitled to full input tax deduction (e.g. in the banking, insurance and healthcare sectors) and therefore benefit financially from the VAT group will then be able to finally breathe a sigh of relief.

This would avert a revolution in the VAT grouping area. Nevertheless, VAT grouping remains a controversial topic that will continue to be the focus of many disputes in the future. An old problem remains: in many cases, there is uncertainty as to whether or not a German VAT group exists at all. An application procedure, as practiced in most EU states, could provide a solution. However, the problems of VAT grouping can only be solved definitively at Union level through greater harmonization and more uniform requirements within the framework of the VAT Directive.

DLA Piper's tax law team will be happy to answer any further questions you may have in this context. Give us a call or send us an e-mail. If you have any further questions in this context, please do not hesitate to contact the tax team at DLA Piper. Please call us or send us an email.