Sweden: VAT on services provided by head office to fixed establishment involving VAT group
Sweden: VAT on services provided by head office
The Court of Justice of the European Union (CJEU) held that services provided by a Danish head office to its fixed establishment in Sweden were subject to Swedish value added tax (VAT) because the Danish head office was part of a VAT group in Denmark.
The case is: Danske Bank A/S v. Skatteverket, case no. C-812/19 (11 March 2021)
This CJEU judgment could have major implications for the VAT treatment of intra-group services—in particular if there is a limited VAT recovery right.
There was uncertainty as to whether services between a head office and a fixed establishment are taxable if it is not the fixed establishment, but the head office, that is part of a VAT group. In the present case, the Swedish court asked the CJEU to render a preliminary ruling on this question.
The taxpayer bank had its head office in Denmark and was part of a VAT group in Denmark. The Danish head office allocated costs for an IT platform to its fixed establishment in Sweden (that fixed establishment was not part of a VAT group in Sweden). The question was whether the fixed establishment in Sweden was required to report Swedish (reverse-charged) VAT on these costs.
A Swedish court referred the following question to the CJEU: Does a Swedish fixed establishment (that is not part of a Swedish VAT group) have to be regarded as an independent taxable person if the Danish head office (that is part of a VAT group in Denmark) provides services for this fixed establishment in Sweden and the costs incurred for this are allocated to the fixed establishment?
The CJEU held that the provision of services between the Danish head office of the bank and its Swedish fixed establishment were subject to VAT. The CJEU, thus, followed the position taken by the CJEU in the Skandia case.
The CJEU concluded that services between a head office and a fixed establishment are only taxable if a legal relationship exists between them in which there is reciprocal performance. In the absence of such a legal relationship between a head office and a fixed establishment that, in principle, form one and the same taxable person, the services are non-taxable internal flows.
The CJEU found, however, that there is a legal relationship between a head office and a fixed establishment if the fixed establishment is regarded as independent from the head office. According to the CJEU, this would be true if the fixed establishment independently performs economic activities and bears the economic risks arising from those activities. In assessing whether there is a legal relationship, it must be determined whether the head office and/or the fixed establishment may be part of a VAT group. A head office that is a member of a VAT group, together with the other members of the VAT group, constitute one taxable person. According to the CJEU, by virtue of the territorial limitation of the VAT group regime, a foreign fixed establishment cannot be part of this VAT group, and thus cannot be regarded as being part of the same taxable person as the head office. The fixed establishment must be regarded as a separate taxable person. Consequently, the services between the head office and the fixed establishment are taxable.
The CJEU judgment implies that, for the qualification of the relationship between the head office and a fixed establishment, it must be taken into account whether one of them is part of a VAT group in another EU Member State. The characteristics of the foreign VAT grouping regime also need to be taken into account.
This judgment also clarified certain other differences between the Danske Bank case and the Skandia case. The CJEU found it is not relevant whether a head office (as in the Danske Bank case) or the fixed establishment (as in the Skandia case) is part of a VAT group; nor does it matter whether a head office is established outside the EU (as in the Skandia case) or in the EU (as in the Danske Bank case). It also seems to be irrelevant whether there are external costs (as in the Skandia case) or internal costs (as in the Danske Bank case) that are recharged.
In many EU Member States, the Skandia judgment had a major impact on the VAT treatment of cross-border services between establishments of the same legal person. In practice, the positions taken by the various EU Member States in response to Skandia are very different. In some EU Member States, the Skandia case has had a far-reaching effect and almost all services between a VAT group and a foreign fixed establishment (that is not part of the VAT group) or head office fall within the scope of VAT. For those EU Member States, the CJEU’s conclusion in the Danske Bank case is a confirmation of their interpretation of the Skandia judgment.
Implications for Dutch practice
To date, the Netherlands has taken the position that the Skandia judgment has no effect in the Netherlands. In 2002, the Dutch Supreme Court held that the territorial boundaries of the Dutch VAT group regime mean that taxable persons with a head office or branch in the Netherlands may be part of a VAT group in the Netherlands. If there is a VAT group in the Netherlands, the foreign establishments (head office or fixed establishments) that are part of the VAT group are also considered part of the Dutch VAT group (that is, one taxable person). Services from and to the foreign head office or fixed establishment thus remain outside the scope of Dutch VAT. This position is applied in practice and was recently reconfirmed by the Deputy Minister of Finance in a new policy statement on VAT fixed establishments. Consequently, the Skandia judgment had no effect in the Netherlands.
Under the Danish and Swedish VAT group regimes, foreign branches of the VAT group’s members are not part of the VAT group. The question is what implications could the Danske Bank judgment have on Dutch practice. Some believe that the immediate impact would be limited in situations when there is a Dutch fixed establishment (or head office) that is part of a VAT group in the Netherlands. Services between a Dutch fixed establishment that is part of a VAT group in the Netherlands and a foreign head office or a foreign fixed establishment are therefore not subject to Dutch VAT.
In the situation when there is a Dutch fixed establishment with a foreign head office that is part of a VAT group there, the question that arises is whether in the future the existence of the foreign VAT group must be taken into account or that current practice can be continued, by which the existence of a VAT group would be ignored. In any case, some believe that services purchased by a Dutch establishment (that is not part of a VAT group) from an establishment in another EU Member State (also not part of a VAT group) of the same legal person would remain non-taxable, regardless of whether there are establishments in other EU Member States that are part of a VAT group in their EU Member State.
The CJEU noted that it does not matter whether a head office is established outside the EU (as in the Skandia case) or in the EU (as in the Danske Bank case). The CJEU referred to the territorial limitation of the VAT group provision in the VAT Directive. It appears that the CJEU does not go so far that a possible VAT group outside the EU must be taken into account (which now includes the VAT group in the United Kingdom).
There is a question as to what implications the Danske Bank judgment may have for the VAT recovery right.
The impact of the Danske Bank case may also be viewed and treated differently by the various EU Member States. From an administrative perspective, the implications may be significant for VAT-able persons operating internationally via fixed establishments and with a VAT group in one or more EU Member States.
The Danske Bank case may affect the treatment in the Netherlands and in other EU Member States. Certain internal or external costs that are currently recharged without VAT within the group may in future be subject to VAT. If an entity within a group is established in more than one EU Member State (head office with fixed establishments), consider examining the impact of the Danske Bank judgment in each of those Member States.
The Danske Bank judgment also creates an additional administrative burden for VAT taxable persons and may require a review of the business model, ERP systems, VAT processes, and procedures and control mechanisms and then a change when necessary.
Read a March 2021 report prepared by the KPMG member firm in the Netherlands
The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.