Developments as regards German tax groups for VAT purposes
Pre-conditions and legal consequences of a tax group
A tax group for VAT purposes requires a controlled company (subsidiary company) to be integrated - within the actual overall circumstances - financially, economically and organisationally into the company of a controlling, economically active entity (parent company). If a tax group exists then the parent company will be liable to pay the VAT on the transactions of a subsidiary company. Furthermore, the fees that are paid in the context of exchanges of services between members of the tax group are, at least under existing German legislation, not subject to VAT; such members are regarded as parts of a unified company.
New perspective on financial integration
The view hitherto taken in German case-law and by the fiscal administration in respect of financial integration was that a corporate entity had to hold a majority of the voting rights of the controlled company as a pre-condition for this type of integration. The BFH, in its ruling of 18.1.2023 (case reference: XI R 29/22), now accepts that there can be financial integration even if the corporate entity holds just 50% of the voting rights of the controlled company, but is nevertheless able to impose its will because it has a majority shareholding in the controlled company and the entity in question is the sole managing body of the controlled company. This adjustment was based on a preliminary ruling from the ECJ (of 1.12.2022, case: C-269/20), according to which the pre-condition for the above-mentioned transfer of the tax liability to the parent company should not explicitly be holding a majority of the voting rights, but rather
- the need to be closely bound to one another by financial, economic and organisational links,
- the avoidance of tax losses and
- the entity being in a position to impose its will on the controlled company.
Could VAT potentially be applied to intra-group sales after all?
The ECJ, in its above-mentioned preliminary ruling, stressed that a tax group for VAT purposes should not entail a risk of tax losses. While a subsidiary is liable for the parent company’s VAT, nevertheless, Germany’s supreme fiscal court fears that VAT losses as a consequence of VAT groups could be generated in a different way. For example, if an entity is active in the areas of banking/insurance, healthcare/social services, education or lets out residential properties and, in doing so, generates VAT-exempt sales without being able to fully deduct the input tax then, for this entity, the inputs procured from a subsidiary company might lead to more favourable VAT consequences than if the respective inputs were procured from an organisation that is not regarded as a subsidiary company. Against this backdrop, the BFH has referred the following question back to the ECJ:
- are intra-group sales within a tax group not actually relevant for VAT purposes or
- would, at least, something different apply if the recipient of the goods or services was not entitled to a full input tax deduction (ruling of 26.1.2023, case reference: V R 20/22).
Please note: If the ECJ decides that the German legislation is not in line with EU law then, in specific cases, there could be huge repercussions where there is no full input tax deduction for VAT group members that are the recipients of goods or services and this would open up structuring potential.