CJEU separates Danish head office from Swedish branch for VAT purposes

15/03/21

On 11 March 2021, the European Court of Justice (‘CJEU’) ruled in the Danske Bank case that a head office is a separate taxable person in relation to a foreign branch for VAT purposes if the head office is part of a VAT group.

Based on the Danske Bank judgment, services between a head office that is part of a VAT group and a foreign branch take place within the scope of VAT. In the case in question, the Swedish branch must consequently pay reverse-charged VAT for the services it received from its Danish head office.

The case is the mirror image of the case in the Skandia judgment, where the foreign branch formed part of a local VAT group with other entities. Although, in that case the CJEU also ruled that the transactions were within the scope of VAT, the judgment is nevertheless surprising. In current Dutch practice it is assumed that if a head office is part of a VAT group this does not have any consequences for the transactions with the foreign branch.

What can this possibly mean for your company?

The ruling is relevant for companies that are established in different countries by means of a head office and fixed establishment(s), and of which either the head office or the fixed establishment is part of a VAT group. The CJEU indicates that a VAT group is a separate taxable person in that case. Intra-group transactions therefore fall within the scope of VAT.

The judgment deviates from current Dutch practice whereby the effects of a VAT group also extend to the foreign head office if the Dutch fixed establishment of that head office is part of a VAT group in the Netherlands. This practice is based on the judgment of the Dutch Supreme Court on 22 November 2002 (ECLI:NL:HR:2002:AD6434). At the time, the Supreme Court ruled that a legal entity established outside the Netherlands with a fixed establishment in the Netherlands is, as a whole, part of the Dutch VAT group. In the recently updated Fixed Establishment Decree (no. 2020-25513, hereinafter: Decree), the State Secretary of Finance refers to the Supreme Court ruling in section 3.2. Based on this interpretation of the concept of a VAT group, the Skandia judgment does not affect the situation in the Netherlands in accordance with the Decree. As a result of the Danske Bank judgment, the big question is whether this interpretation should be revised.

The Skandia judgment has been interpreted in different ways in the EU. Certain Member States already apply the ruling to all transactions involving a VAT group. Others have limited this, depending upon the local interpretation of the VAT group or the desire to align the treatment in the corresponding Member State. The question of whether local adaptation is necessary will therefore arise in more Member States.

In any event, if a VAT group is by definition to be regarded as a separate taxable person from other foreign branches, the CJEU’s Morgan Stanley judgment will become less relevant in such situations. In short, this case dealt with the VAT recovery of costs used by several establishments of the same taxable person.

The ruling in the Danske Bank judgment may have a significant impact. We recommend assessing the potential impact of this ruling carefully, both for your Dutch establishments as well as establishments in other EU Member States. Because there are separate taxable persons and therefore independent services, your company may have a liability to report and remit reverse-charged VAT on costs that establishments charge one another. Furthermore, the judgment may affect the right to recover input VAT if it is also based on the turnover of the various foreign establishments.

Feel free to contact your PwC advisor or one of the contacts below about this.

Facts of the case

Danske Bank is headquartered in Denmark and conducts operations in Sweden through a branch office. The head office in Denmark is part of a VAT group. The branch in Sweden qualifies as a fixed establishment for VAT purposes and is not part of a Swedish VAT group.

For its operations, the bank uses an IT platform that is used by all branches. For the use of this platform, the head office charges fees to the branch office in Sweden. The question is whether the Swedish branch must pay reverse charge VAT on the remuneration for using the platform.

The Swedish tax authorities believe that the branch should be regarded as an independent taxable person. The head office ‘separated’ itself from the branch office by being part of a VAT group in Denmark. As a result, the branch should pay reverse charge VAT for services it purchases from the VAT group.

Danske Bank considers that the branch is part of the same taxable person as the head office, as the branch is not independent from the head office and it is not part of a VAT group in Sweden. As a result, services from the head office to the branch do not take place in the course of business and no reverse charge VAT is payable by the branch.

Background and question to the CJEU

The CJEU ruled in 2006 in the FCE Bank case that transactions between a head office and a fixed establishment do not constitute taxable services for VAT purposes because a fixed establishment is not an independent taxable person for the services it receives from the head office. In 2014, the CJEU refined this judgment by ruling in the Skandia America Corporation (‘Skandia’) case that services provided by a head office to a fixed establishment are subject to VAT when the fixed establishment in an EU Member State is part of a VAT group. In that case, the fixed establishment separates itself from the head office by becoming part of another taxable person, being the local VAT group.

The situation in the Danske Bank case is the mirror image of the situation in the Skandia case. Whereas in the Skandia case it was the fixed establishment that is part of a VAT group, in the Danske Bank case it is the head office that is part of a VAT group that provides services to a branch.

For the referring court, it is unclear whether it should follow the judgment in the FCE Bank case or the judgment in the Skandia case, and it therefore requests a preliminary ruling from the CJEU.

CJEU judgment

With its ruling in the Danske Bank case, the CJEU follows the judgment in the Skandia case. Because the head office in Denmark is part of a local VAT group, it has ‘separated’ itself from the branch office in Sweden. The Swedish branch is a separate taxable person for the services it receives from the Danish head office. The CJEU explains this by stating that based on the EU VAT Directive the VAT group is territorially limited.

Since the Swedish branch no longer constitutes a single taxable person with the Danish head office, the Swedish branch is liable to report and remit reverse charge VAT for the services it receives from the VAT group in Denmark. The CJEU thus extends the effect of the Skandia judgment to all services between establishments where one of the establishments is part of a VAT group.