On March 1, 2017 the Advocate General (‘AG’) to the Court of Justice of the European Union (‘CJEU’) issued her Opinions in the DNB Banka (no. C-326/15) and Aviva (no. C‑605/15) cases. The AG concluded that the VAT exemption for cost-sharing groups cannot be applied in the financial and insurance markets and neither in cross‑border situations. The AG however advised the CJEU to narrowly interpret the criterion that application of the VAT exemption for cost-sharing groups is not likely to cause distortion of competition.
1. The case
DNB Banka case
The taxpayer (‘DNB Banka’) is a credit institution in Latvia and is part of the DNB Group. DNB Banka purchased various services from group companies in other EU Member States. This concerns:
- financial services;
- IT services;
- software licenses.
DNB Banka was charged for the financial and IT services at cost plus 5%.
Following a dispute about the application of the VAT exemption for cost-sharing groups on the above services, the Latvian court asked the CJEU for a preliminary ruling on:
- the application of this VAT exemption in cross-border situations;
- the interpretation of the term ‘independent groups of persons’ (‘cost-sharing group’);
- the impact of transfer pricing adjustments for the purposes of this VAT exemption;
The Aviva group is active in the European insurance market and considered establishing a number of shared services centers in selected EU Member States, in the legal form of an European Economic Interest Grouping (‘EEIG’). These shared services, in the field of, for example, HR, finance and accounting, IT, administration, customer service and product development, were to take place within the framework of the insurance activities of the group companies. For the group companies in Poland, a request was submitted to the local tax authorities for approval to apply the VAT exemption for cost‑sharing groups to the purchased shared services. This request triggered a dispute with the local tax authorities and questions from the Polish court to the CJEU on the interpretation of the criterion that the VAT exemption for cost-sharing groups is not likely to cause distortion of competition.
2. Opinions of Advocate General at CJEU
In her opinions, AG Kokott addresses the questions referred to the CJEU about the application of the VAT exemption for cost-sharing groups in the above cases. This VAT exemption applies to:
- services performed by cost sharing groups;
- who perform an activity which is exempt or for which they are not subject to tax;
- in order to provide their members with the services that are directly necessary for the exercise of that activity;
- where those groups merely claim from their members the reimbursement of their share of the joint costs;
- provided that this exemption does is not likely to cause distortion of competition.
DNB Banka case
According to the AG, only taxpayers for VAT can be regarded as a cost‑sharing entity. This is also the standard interpretation in the Netherlands. However, a group ‘as such’ is not an independent taxpayer for VAT, unless this group forms a VAT group. A group ‘as such’ therefore does in principle not qualify as a cost-sharing entity. The AG states in this respect that an independent company, which is part of a group, is in principle eligible to apply the VAT exemption for cost-sharing groups to the services it provides. However, services performed by the members to the cost-sharing entities are in that case not covered by this VAT exemption. In our view, it should be possible that different cost-sharing entities exist within a group of companies, each with their own cost-sharing members. Group companies should therefore be able to become a cost-sharing member of different cost-sharing entities within a group.
The AG also concluded that the VAT exemption for cost-sharing groups does not apply (i) to services to taxpayers with VAT-exempt financial and insurance services and (ii) in cross-border situations. In her Opinion in the Aviva case, the AG elaborates on this in more detail (see below). She also concluded that the application of the VAT exemption for cost-sharing groups does not apply if a transfer pricing adjustment forms part of the expenses claimed from cost-sharing members by the cost-sharing group.
As stated in the Opinion in the DNB Banka case, according to the AG the VAT exemption for cost-sharing groups does not apply to:
- services to taxpayers that perform VAT-exempt financial and insurance services. According to the AG, this follows from the purpose of the VAT exemption for cost-sharing groups (seen in conjunction with the purpose of the VAT exemption for financial and insurance services) and the place where the VAT exemption for cost-sharing groups is inserted into the EU VAT directive;
- cross-border situations. The AG states that this follows from the history of the provision on the VAT exemption in the VAT directive. Furthermore, the AG points to the difficulty for EU Member States of verifying compliance with the conditions in other EU Member States and the importance of avoiding conflicting decisions by different tax authorities. The AG also sees problems with the VAT savings that can be realized if a cost-sharing group outside the EU provides services to cost-sharing members inside the EU.
In addition to this, the AG advised the CJEU to narrowly interpret the criterion that application of the VAT exemption for cost-sharing groups is not likely to cause distortion of competition. Only abuse situations could then cause such a distortion. National legislators also do not have any discretion when transposing this criterion into their national legislation. The absence of additional conditions for this criterion in Polish national legislation is therefore permitted. The Dutch regime, under which certain cost-sharing groups and services are excluded (via ministerial regulations) because they distort competition, may be contrary to the VAT Directive. As the AG points out, each additional elaboration increases the risk of an infringement procedure against an EU Member State.
3. Potential implications
If the CJEU follows the Opinions issued by the AG in the DNB Banka and Aviva cases, then this could have far-reaching consequences for existing VAT cost-sharing groups in the financial and insurance market and in cross-border situations. In such situations the VAT exemption for cost-sharing groups no longer appears to apply.
However, if the CJEU were to reach a different conclusion, this would offer new possibilities. If the CJEU were to rule, in line with the AG's Opinion, that the competition criterion must be narrowly interpreted, then the current exclusions from the Dutch VAT exemption for cost-sharing groups may be too broad.
Moreover, the pending infringement proceedings against Luxembourg (no. C-275/15) and Germany (no. C-616/15) could also be relevant for the interpretation of the VAT exemption for cost-sharing groups in the Netherlands.
The tax advisors of Meijburg & Co’s Indirect Tax Financial Services Group would be pleased to help you identify how this case could impact your business and provide you with constructive advice about the opportunities this can offer you in the future. Feel free to contact one of them or your regular contact for more information.