On May 8, 2014 Advocate General (“AG”) Wathelet issued his Opinion in the Skandia America Corporation case. He concluded that transactions between a foreign head office and a fixed establishment that is part of a VAT group are outside the scope of VAT. However, it appears that the AG considers this an undesirable situation, because it means that transactions between the head office and the fixed establishment, as well as transactions within the VAT group, are not subject to VAT. The AG suggests a number of alternatives, under which the transactions would be subject to VAT.
1. The case
Skandia America Corporation (“Skandia”) is established in the United States and has a fixed establishment in Sweden. The fixed establishment is part of a Swedish VAT group. In 2007 and 2008, the US head office recharged (with a mark-up) externally acquired IT services to the Swedish fixed establishment. The Swedish fixed establishment modified the IT and, in turn, recharged the IT costs with a mark-up to the other group companies (both within and outside the VAT group).
The Swedish court requested a preliminary ruling from the Court of Justice of the European Union (CJEU) on whether VAT is payable on the external services purchased by the head office that were allocated to the fixed establishment, given that the fixed establishment is part of a VAT group. If this was the case, it also asked whether the VAT reverse charge mechanism applied.
2. Opinion AG
The first fact established by the AG is that where a head office and a fixed establishment are part of one legal entity, they, together, form one single taxpayer. According to the AG, this means that both the fixed establishment and the head office are part of the VAT group. As such, the basis assumption is that no VAT is payable on the costs recharged to the Swedish fixed establishment.
The AG concluded that the fact that the fixed establishment (and the US head office) both are part of the VAT group means that not only (1) transactions between the head office and the fixed establishment, but also (2) transactions between the fixed establishment and the other companies in the VAT group are not subject to VAT. The AG considers the confluence of these two rules incompatible, because the services provided from the US to the companies making up the Swedish VAT group would then not be subject to VAT. The clause in the EU VAT Directive dealing with the VAT group allows measures that are necessary to prevent tax fraud and tax evasion and encourages measures to combat them. The AG therefore believes that the decision by the Swedish tax authorities to include the Swedish fixed establishment in the VAT group is contrary to the clause on VAT groups in the EU VAT Directive. It is subsequently up to the Swedish national courts to decide on the impact of this conclusion. The AG suggests four alternative approaches, which all have in common that VAT is payable on the IT services provided from the US. If the CJEU were to rule that the services between the head office and the fixed establishment are subject to VAT, then the AG believes that the VAT group must pay reverse charged VAT on these services.
The AG’s point of departure is therefore in line with current Dutch practice. Transactions between a foreign head office and a fixed establishment that is part of a VAT group are outside the scope of VAT. The four alternatives suggested by the AG may, however, result in VAT being payable. With regard to these alternatives, it would appear that they could not have retroactive effect in the Netherlands, and, depending on the alternative, it may be necessary to amend Dutch legislation.
3. What are your options?
At present, this only concerns an Opinion issued by the AG, which the CJEU is not obliged to follow. However, you can already take steps to determine what effect any future judgment by the CJEU will have on the VAT position of your business and what its financial impact will be. Because the VAT treatment of transactions between a foreign head office and a fixed establishment that are part of a VAT group is not harmonized throughout the Member States, it is essential that you not only thoroughly identify all the issues at stake in the Netherlands, but also do this for the other Member States. Depending on the Member State, it may still be possible to file an objection against the foreign VAT you currently pay on such transactions.
If you would like to discuss the AG’s Opinion, or if you would like to find out what effect the CJEU judgment could have on the VAT position of your business, please contact one of the advisors of the Indirect Tax Financial Services Group at KPMG Meijburg & Co, or your own Meijburg tax advisor.