On September 17, 2014, the Court of Justice of the European Union (“CJEU”) rendered its judgment in the Skandia America Corporation case. The CJEU ruled that services provided by a head office to a fixed establishment that is part of a VAT group are subject to VAT. The VAT due must be paid by the VAT group as purchaser of the services. This judgment of the CJEU is not in line with Dutch practice. This may also be the case in other EU Member States.
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 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.
The CJEU ruling
The CJEU ruled that:
- Services performed by the head office of Skandia in the United States for its fixed establishment in Sweden, which is part of a VAT group in Sweden, constitute taxable transactions for VAT purposes.
- The services are taxable in Sweden. The VAT group in Sweden is subject to Swedish VAT under the reverse charge mechanism.
This ruling implies that the services are not deemed to be performed between the US head office and the Swedish fixed establishment of Skandia. Rather, the services are deemed to be performed between the US head office of Skandia and the VAT group in Sweden. The Swedish fixed establishment of Skandia is part of this VAT group in Sweden and thus services are provided between two separate taxpayers.
The services are taxable in Sweden, the country where the purchaser is resident. For VAT purposes, the Swedish fixed establishment of Skandia is deemed to be part of a VAT group in Sweden, a different taxpayer than the US head office of Skandia. The latter, as service provider, is therefore not regarded as a taxpayer with an establishment (fixed establishment) in Sweden. For this reason, the Swedish VAT payable was reverse charged to the purchaser, the VAT group in Sweden.
It is standard practice in the Netherlands that transactions between a foreign head office and its Dutch fixed establishment, which is part of a VAT group in the Netherlands, fall outside the scope of Dutch VAT. This follows from the case law of the Dutch Supreme Court (June 14, 2002, case No. 35 976).
It was an established fact in the Skandia case that only the Swedish fixed establishment was part of the VAT group in Sweden. The US head office was not. However, in the abovementioned Dutch Supreme Court case, the Court ruled that the foreign head office in question was also part of a VAT group in the Netherlands. The question is therefore whether a foreign head office, with a fixed establishment in the Netherlands, must always be regarded as a separate taxpayer. If a foreign head office, with a fixed establishment in the Netherlands, has a sufficient economic link with companies resident in the Netherlands, the foreign head office may form part of a VAT group in the Netherlands.
In addition, in the Skandia case ‘external costs’ were recharged. It is not clear whether the ruling of the CJEU also applies to the recharging of ‘internal costs’.
In the reverse situation, where a domestic head office is part of a VAT group and also has a fixed establishment in a foreign country (which is not part of a VAT group there), there should not be separate taxpayers in our view, since, in accordance with the ruling of the CJEU in the Skandia case, a fixed establishment itself is not recognized as a taxpayer.
The CJEU refers to a head office in a ‘third country’. The question is whether the ruling of the CJEU in the Skandia case has the same effect if a head office is resident in a country within the European Union.
Until the date of the ruling of the CJEU, we take the view that the principle of legal certainty guarantees that transactions entered into between a foreign head office and a Dutch fixed establishment, which is part of VAT group in the Netherlands, remain outside the scope of Dutch VAT. A comparable interpretation of the implications of CJEU case law can be found in Dutch Supreme Court case law.
What are your options?
In the future, recharged VAT may be payable on services provided between a foreign head office and a Dutch fixed establishment that is part of a VAT group in the Netherlands. It is advisable to assess the risks, including an assessment of individual agreements with the Dutch tax authorities on recharging, the split between internal and external costs and the assessment of the conditions for the creation of a VAT group. If necessary, an objection can be filed against the payment of reverse charged VAT.
The ruling of the CJEU in the Skandia case may also have practical implications in other Member States. In principle, CJEU case law has retroactive effect. Depending on the particular impact in a Member State, VAT may therefore be levied on transactions that have taken place in the past.
If you would like to discuss this judgment, please contact one of the advisors of the Indirect Tax Financial Services Group at KPMG Meijburg & Co, or your own Meijburg tax advisor.