March 20, 2023
In December last year, VAT groups legislation in Germany was brought to the European Court of Justice (ECJ). The ECJ was judging whether the VAT group rules comply with the European Union‘s law. Before we look at the ECJ‘s decisions, let‘s first have a refresher on what the VAT groups are.
In European Union, VAT groups are permitted. When a country chooses to allow VAT grouping, closely-linked companies and non-taxable entities can gather to create a single VAT-taxable entity. To make a group, the companies have to be linked in terms of organizational structure and financial and economic aspects. Once the group is formed, it receives a single VAT number and submits consolidated VAT reports. Among the benefits of VAT grouping is the potential to manage cash flow better — when one company generates more VAT deductible while another doesn‘t, the group can pay VAT authorities the difference.
However, German VAT groups were considered as breaching the EU VAT directive in several potential ways. The ECJ looked at several aspects of the German VAT grouping and provided the following conclusions:
Taxable person status
German VAT rules regard the parent entity of the group, and not the group itself, as the taxpayer. The other members of the group are, in a sense, included in the parent company when it comes to VAT. The ECJ rules that this aspect complies with the EU VAT directive because the directive does not specify how the group should be represented.
The financial integration area is where the German VAT grouping does not comply with the EU VAT laws. According to the ECJ, the European VAT directive does not specify that the controlling company and other group members should have a subordinate relationship. So according to European law, if the controlling company owns the majority of shares, it should not necessarily be required to control the majority of voting rights.
As the German grouping rules consider non-controlling companies as absorbed into the parent entity, the intra-group supplies are also treated as made by non-independent entities. The transactions made within the group are then VAT-exempt. The ECJ‘s decision was that a country could not hold VAT group members automatically independent. The European VAT law states that the country‘s taxation authorities should review whether the entities are indeed non-independent or whether they have some individual economic activity.
If you have any questions on how to manage VAT responsibilities in Germany, reach out to us, and our professional team will help you!