On May 4, 2017 the Court of Justice of the European Union (‘CJEU’) rendered judgment in the infringement proceedings initiated by the European Commission against Luxembourg (case no. C-274/15). The CJEU ruled that the VAT exemption for cost-sharing groups does apply if the members of a cost-sharing group also perform services subject to VAT, provided the services of the cost-sharing group are ‘directly necessary’ for the VAT exempt or non-taxable activities of the members. Furthermore, the CJEU ruled that the members of a cost-sharing group are not entitled to deduct the VAT charged to (or which is payable by) the cost-sharing group. If the members of a cost-sharing group purchase goods and services in their own name and for the account of the cost-sharing group, they are providing services to the cost-sharing group that fall within the scope of VAT.

1. Infringement proceedings against Luxembourg

In 2011 the European Commission initiated infringement proceedings against Luxembourg. The infringement proceedings concern the implementation of the EU VAT exemption for cost-sharing groups in the national VAT legislation of Luxembourg. This VAT exemption applies to:

  • services performed by independent groups of persons;
  • who perform an activity which is VAT exempt or non-taxable;
  • in order to provide their members with the services that are directly necessary for the exercise of this activity;
  • where those groups merely claim from their members the reimbursement of their share of the joint expenses;
  • provided that this exemption does not lead to a distortion of competition.

The European Commission’s objections are that:

  1. the Luxembourg VAT exemption for cost-sharing groups also applies to services that are not (or may not be) directly necessary for the exercise of the VAT exempt or non-taxable activities of the members of a cost-sharing group;
  2. a VAT deduction entitlement is granted to the members of the cost-sharing group for goods and services purchased by the cost-sharing group; and
  3. by purchasing goods and services in their own name and for the account of the cost-sharing group the members are not providing services to the cost-sharing group that fall within the scope of VAT.

Because Luxembourg VAT legislation on the above points was not promptly amended, the European Commission initiated appeal proceedings before the CJEU in 2015. At present, three other cases about the application of the VAT exemption for cost-sharing groups are pending before the CJEU. On March 1, 2017 Advocate General Kokott rendered her Opinion in the DNB Banka (no. C-326/15) and Aviva (no. C-605/15) cases and on April 5, 2017 Advocate General Wathelet issued his Opinion in the infringement proceedings initiated by the European Commission against Germany (no. C-616/15).

2. CJEU judgment

The CJEU ruled that Luxembourg VAT legislation on the above points is not in line with the EU VAT Directive. The most important conclusions of the CJEU are explained below.

(i) The ‘directly necessary’ requirement

Under Luxembourg VAT legislation, a maximum of 30% (under certain conditions a goodwill gesture of 45% applies) of the annual turnover of members of a cost-sharing group can relate activities subject to VAT. If this cap is not exceeded, the services of the cost-sharing group are considered to be ‘directly necessary’ for the VAT exempt or non-taxable activities of the members. The CJEU concluded that:

  • the VAT exemption for cost-sharing groups also applies to cost-sharing groups with members that also perform activities subject to VAT, provided the services of the cost-sharing group are ‘directly necessary’ for the VAT exempt or non-taxable activities of the members;
  • the services of a cost-sharing group are not, by definition, general costs of the members; and
  • it cannot be precluded that cost-sharing groups apply the VAT exemption on a pro rata basis (on their sales invoices). Based on this approach, the pro rata VAT recovery rate of the members should be followed for practical reasons (aside from specific exceptions when calculating the pro rata VAT recovery rate).

The conclusions of the CJEU have not removed the ambiguity surrounding the question whether a cost-sharing group may also provide services subject to VAT to third parties (non‑members), as was being dealt with by the CJEU in the AXA Belgium SA case (no. C-168/07), which was withdrawn by Order.

(ii) VAT deduction by members of a cost-sharing group

The CJEU firstly emphasized that cost-sharing groups should be independent taxpayers that, for VAT purposes, are thus independent vis-à-vis their members. The abovementioned Opinions issued by the Advocates General also make clear that Advocate General Kokott and Advocate General Wathelet do not entirely share the same position on this point. The CJEU ruled that the members of a cost-sharing group are not entitled to deduct the VAT charged to (or which is payable by) the cost-sharing group. Moreover, VAT can only be deducted if the party entitled to a deduction is listed as the customer on the purchase invoice.

(iii) The purchase of goods and service by members

Under Luxembourg VAT legislation, members that purchase goods and services in their own name and for the account of the cost-sharing group do not provide services to the cost-sharing group that fall within the scope of VAT. Because cost-sharing groups and their members are independent taxpayers (vis-à-vis one another), the CJEU concluded that the members are performing services to the cost-sharing group that fall within the scope of VAT. According to the CJEU, this is supported by the “commission agent fiction” in the EU VAT Directive.

3. Importance for the practice

The above CJEU judgment makes clear that the VAT exemption for cost-sharing groups does apply if the members of a cost-sharing group also perform services subject to VAT, provided the services of the cost-sharing group are ‘directly necessary’ for the VAT exempt or non-taxable activities of the members. This criterion is difficult to implement in practice if the members of a cost-sharing group also perform activities subject to VAT. The CJEU appears to be making it possible to apply the VAT exemption for cost-sharing groups in that situation on the basis of the pro rata VAT recovery rate of the members (aside from specific exceptions when calculating the pro rata VAT recovery rate). This would be a feasible approach, which the EU VAT Committee had already put forward for situations where the members of a cost-sharing group also perform activities subject to VAT (Working Paper no. 883).

In answering parliamentary questions, the Dutch Deputy Minister of Finance indicated that official merger organizations (ambtelijke fusieorganisaties) may apply the VAT exemption for cost-sharing groups if municipalities (the members) generate at least 70% non-taxable turnover (no. DGB/2015-5904).

In the Netherlands, taxpayers that apply the ‘costs for joint account’ principle may deduct the VAT on costs in proportion to their financial contribution. However, when applying this principle the party paying the costs should also bear part of the costs itself. The Supreme Court confirmed the VAT deduction by the participants in this type of cooperation (case no. 42.312). In addition to this, there are specific approvals in the Netherlands for other forms of cooperation.

At present, three other cases about the application of the VAT exemption for cost-sharing groups are pending before the CJEU. All of these cases, including the infringement proceedings against Luxembourg, could have far-reaching implications for the application of the VAT exemption for cost-sharing groups.

The tax advisors of Meijburg & Co’s Indirect Tax Financial Services Group would be pleased to help you identify how the abovementioned cases could impact your business and provide you with constructive advice about the opportunities these cases can offer. Feel free to contact one of them or your regular contact for more information.

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