Latest German Federal Tax Court case law on VAT groups

In its ruling of 18 January 2023 (XI R 29/22; formerly XI R 16/18), the German Federal Tax Court (BFH), as a result of the rulings of the Court of Justice of the European Union (CJEU) that have been issued in the meantime, deals with the status of the controlling company as a taxable entity as well as the conditions of financial integration within the scope of the VAT group. However, the BFH has referred the issue of allegedly non-taxable intra-group services to the CJEU again (CJEU referral of 26 January 2023, V R 20/22; formerly V R 40/19). We have already commented on the previous CJEU rulings in an earlier blog post.

The current ruling of the BFH is also only able to provide clarity on the German regulations of the VAT group with regard to the status of the controlling company as a taxable entity as well as the requirements of financial integration within the framework of the VAT group. However, due to the renewed referral to the CJEU, there is above all a lack of a conclusive decision with regard to non-taxable intercompany services.

The controlling company is and remains the taxpayer

As was to be expected after the CJEU ruling, the BFH does not deviate from the CJEU’s opinion according to which the controlling company can be regarded as a taxable person. However, controlled companies lose their status as taxable persons when they are integrated into the VAT group.

Change in BFH case law on the prerequisite for financial integration

The BFH abandons its previous case law regarding the prerequisites for financial integration. According to German practice, such financial integration previously 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 does not necessarily require a majority of voting rights, but that it is nevertheless still necessary for the controlling company to be able to assert its will. According to the BFH, it is sufficient that the controlling company holds 50% of the voting rights. However, this now lower level of voting rights must then be compensated for by other organisational circumstances. In the underlying case, for example, the controlling company provided the controlled company with its sole managing director.

Note: As already mentioned in our previous article as a possible consequence of the CJEU rulings, the BFH now no longer adheres to its opinion on the prerequisite of a majority of voting rights. This in turn should mean that Section 2.8 (5) of the VAT Application Decree will have to be amended.

Still great ambiguity with regard to (supposedly non-taxable) intercompany services

In its rulings, the CJEU has not made a clear statement on the taxability of intra-group services, which is why the BFH is now approaching the CJEU again with a request for a preliminary ruling (Request for a preliminary ruling of 26 January 2023, see above) and asking the CJEU for an opinion on this extremely practice-relevant topic. The BFH asks whether the grouping of several persons into one taxable person under Article 4(4)(2) of Directive 77/388/EEC means that services for consideration between these persons do not fall within the scope of application of VAT.

With its renewed request for a preliminary ruling, the BFH is thus expressly asking for final clarification of the treatment of services in a (German) VAT group. The CJEU's answer to this question is eagerly awaited. Should the CJEU actually decide that contrary to previous BFH case law, intercompany services are taxable, this would turn the German practice of VAT grouping on its head. At the moment, businesses who are not entitled to full input VAT deduction (e.g. in the banking, insurance and health sectors) benefit from the tax group. According to the current treatment, these businesses do not suffer any input VAT losses despite input VAT-damaging output services, because these input services are not considered taxable within the VAT group.

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.