IGPs’ fate sealed for good
Release of the CJEU decisions in DNB Banka, Aviva, and Commission against Germany1
After the release of the Commission against Luxembourg case2 and the agitation it caused amongst the Luxembourgish financial community, the time has come for the Court of Justice of the European Union (CJEU) to decide further on the application of the VAT exemption provided by article 132, 1, f) of Directive 2006/112/EC on the services supplied by independent groups of persons (IGPs) to their members. The CJEU finally reached its decision in the last pending cases which were referred either by Member States (DNB Banka and Aviva) or by the European Commission (Commission against Germany).
Reminder of facts:
• Aviva and DNB Banka
The questions raised regarding DNB Banka concern the status (form) of the IGP, namely the personal scope of application of the exemption. The primary issue in Aviva affects the material scope of application of article 132, 1, f) of the VAT Directive (whether this article should also cover companies active in the insurance sector). Furthermore, both cases relate to the territorial scope of the IGP (and specifically its cross-border character).
Ancillary questions were also discussed, i.e. direct effect of article 132, 1, f) of the VAT Directive in national law or the determination of an “absence of distortion of competition.”
Advocate General Kokott gave her opinion on both cases on 1 March 2017.
• Commission against Germany
In this case, the questions referred to the CJEU concern the scope of application of the exemption by the German government. Indeed, in Germany the exemption is limited to a number of enumerated professions active in the health sector, i.e. doctors and paramedicals or assimilated, which can benefit from the exemption in question. The reason underlying this restriction is the criterion of non-distortion of competition. This was challenged by the European Commission who brought the action before the Court.
Advocate General Wathelet gave his opinion on this case on 5 April 2017.
Main elements of the opinions given:
• Aviva and DNB Banka
In Aviva, Advocate General Kokott said that an IGP active in the insurance sector should not benefit from the VAT exemption provided under article 132, 1, f) of the VAT Directive.
She further underlines the fact that the VAT exemption was not applicable in cross-border situations. Indeed, it results from the wording of article 132, 1, f) of the VAT Directive that these provisions should not give rise to a distortion of competition. The limitation of the territorial scope of the exemption is therefore justified by the fact that a cross-border application should lead to the monitoring of a multitude of local markets to ensure the absence of such distortion. The latter implies a systemic re-evaluation often operated on the basis of complex economic analyses. This should be difficult to undertake by local tax authorities of one Member State in another. Advocate General Kokott is of the opinion that the fundamental freedoms do not preclude a restrictive interpretation of the provision when justified (the need to preserve the allocation of the power to impose taxes between the Member States and the need to guarantee the effectiveness of fiscal supervision).
In DNB Banka, Advocate General Kokott cites the definition of an IGP, which should only be a taxable person acting as such, the central element being that the IGP carries out an economic activity independently within the meaning of the Directive. Therefore, an IGP having no separate existence, but being constituted through related companies active in the banking sector, does not fall under the scope of the exemption.
She also underlines the fact that article 132, 1, f) does not apply in the case of undertakings supplying financial services, as the VAT Directive entails a specific exemption regarding this category of services (article 135 of the VAT Directive).
Advocate General Kokott further states that the IGP should not have any cross-border implications. In this respect, the application of the non-distortion of competition criterion confirms the fact that the exemption should be limited.
• Commission against Germany
A contrario, regarding the notion of IGP, Advocate General Wathelet states that it should be viewed as transparent for VAT purposes and therefore not limited to taxable persons acting as such vis-à-vis their members in the services which they provide to them.
He goes further, stating that the application of the exemption should also be considered together with its objective: preventing the payment of an irrecoverable VAT for the members of the IGP. Finally, it results from these elements that the wording entailed in article 132, 1, f) of the VAT Directive should be reviewed, insofar as it should not be restricted to “activities linked with the public interest.”
The criterion of non-distortion of competition should be examined based on the facts referred to in each and every situation at stake. He indeed underlines the fact that the only justified limitation is the “genuine risk that the exemption may by itself immediately or in the future, give rise to distortion of competition.”
Decisions of the CJEU:
In the decisions released today, the CJEU decided to limit the scope of application of the exemption provided under article 132, 1, f) of the VAT Directive in a drastic way.
In particular, the limitation concerns the material scope of application of the VAT exemption. The CJEU states that article 132, 1, f) should not apply to companies active in the insurance and/or financial sector but only to those carrying out activities linked to public interest. The first two categories of services are indeed covered by another provision under the VAT Directive (namely article 135). Therefore, for the exemption to apply, it appears that the services provided by the IGPs to their members should be linked to “public interest” (which goes against the opinion of Advocate General Wathelet in the Commission against Germany case).
However, restricting the application of this exemption to a certain number of enumerated professions, as the German government currently does, is contrary to the VAT Directive. Indeed, it should not be possible to select to which activities of public interest this exemption might apply.
Other questions (i.e. status and cross-border character of the IGP) were not answered by the CJEU as they were considered obsolete.
If, after the release of the Commission against Luxembourg decision in last May 2017, the fate of IGPs seemed already quite unsure, these three decisions appear to sound their death knell. Member States using the exemption provided under article 132, 1, f) should therefore review their legislation. In Luxembourg, it is worth noting that, in order to comply with the decision of the CJEU in the Commission against Luxembourg case, the government already repealed the Grand-Ducal decree on the VAT exemption for IGPs in July 2017. It is now however necessary to carefully contemplate and swiftly implement other alternatives (namely VAT groups) for companies active in the financial and insurance sector.
1. C-326/15, C-605/15, C-616/15
2. C-274/15, see our alert
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