Supreme Court makes it easier to create a VAT group

Publication date 25 October 2013

In the Netherlands, multiple persons can together be regarded as a VAT group. In practice, the economic link condition raises the most questions, as it is more difficult to measure than the financial and organizational links, which are also both conditions for a VAT group. In its judgment of October 11, 2013, the Supreme Court extended the scope of the economic link, thereby making it easier to create a VAT group. This is particularly important for exempt VAT taxable persons working together as a group, such as care and educational institutions, banks and insurers.

The judgment is particularly important for persons whose right to recover input VAT is limited. Persons working together in a group can, by forming a VAT group, (i) avoid VAT on intra-group transactions, and (ii) in some cases increase their right to recover VAT.

In the past, the Supreme Court ruled that the condition of economic link could be met in two ways. The first possibility was if the intra-group services or goods supplied amounted to more than 50%. The second possibility was if there was a joint customer base.

In the case in question, the taxpayer met the condition of financial and organizational links, because the holding company held all the shares in its participations and received payment for its management of these companies. Only the condition of the economic link was in dispute. The taxpayer supplied goods to the VAT group, with which it also had several customers in common. The mutual economic link among the companies was non-negligible. The Supreme Court ruled that the economic link was present.

We consider that maintaining mutually non-negligible economic relationships is a verifiable and practicable criterion for determining the economic link. The creation of a VAT group still requires that the members be financially and organizationally linked to each other. A tax analysis of the facts is therefore necessary to assess whether a VAT group can be created.