VAT on services provided by a head office to its fixed establishment? Skandia 2.0

On October 30, 2019, the Swedish Supreme Court announced to refer to the European Court of Justice (‘CJEU’) the question whether services provided by a Danish head office to its fixed establishment in Sweden are subject to Swedish VAT.

The case is basically a follow-up to the CJEU’s Skandia America Corporation judgment (no. C-7/13) (‘Skandia’) and is to a certain extent a mirror image of it. We will obviously have to wait for the CJEU’s judgment, but it clearly may have a major impact on the VAT treatment of intra-group services. We recommend examining the potential consequences in advance.

The Skandia case 

Before we address the new case, we would like to remind you of the Skandia case. Skandia was a groundbreaking judgment on the VAT treatment of cross-border intra-group services. It was the subject of much debate, particularly in the financial sector, where groups often operate in several EU Member States through fixed establishments. In the judgment, the CJEU ruled as follows: 

• 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. 

The VAT group in Sweden is considered to be a different taxable person than Skandia’s US head office. What is special about this case is that although the head office and the fixed establishment are part of a single legal entity, for the purposes of VAT there is a supply of services between two separate (or independent) taxable persons, which is in principle subject to VAT. 

Even after the CJEU judgment in the Skandia case, there is uncertainty in Sweden about the taxability of services between a head office and a fixed establishment if at least one of them is part of a VAT group in Sweden or abroad. In particular, for the situation in which a head office is part of a VAT group and a fixed establishment in its country is not part of a VAT group (also referred to as the ‘reverse-Skandia’ situation), there is a lack of clarity about the VAT treatment of intercompany services. The big question is: does Skandia have a broad scope, as a result of which all transactions between fixed establishments (in which at least one fixed establishment is part of a VAT group) are in scope of VAT, or is the scope limited to situations such as Skandia? 

The Swedish court has asked the CJEU about this situation. 

Danske Bank case

The present case concerns the Swedish fixed establishment of Danske Bank. Danske Bank is a bank with its head office in Denmark, which in Denmark is part of a VAT group. The Danish head office allocated costs for an IT platform to its fixed establishment in Sweden, which is not a member of a VAT group in Sweden. The question is whether the fixed establishment in Sweden is required to report Swedish (reverse charge) VAT on these costs. 

The Swedish court held that, despite the Skandia judgment, there is a lack of clarity in Sweden on this topic, and decided to refer a question to the CJEU for a preliminary ruling. In essence, the CJEU was asked: “should a Swedish fixed establishment (not a member of a Swedish VAT group) be regarded as a taxable person in its own right when the Danish head office (which is a member of a VAT group in Denmark) allocates costs to its fixed establishment in Sweden?”. 

Acte éclairé? 

An important difference with the Skandia case is that the head office in this case is established within the EU, whereas in the Skandia case the head office was established in the United States. 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. Another difference is that in the Skandia case there were external costs on which no VAT was paid, whereas the Danske Bank case appears to be about internal costs or other costs with VAT. 

For the rest, the present case does not seem to be very different from the actual situation in the FCE Bank case (no C-210/04). Although it is common knowledge that the head office of FCE Bank in the United Kingdom was part of a VAT group, this was not included in the reference and the CJEU subsequently ruled that the services provided by FCE Bank’s head office to its non-autonomous fixed establishment in Italy were not subject to VAT, in short, because they constituted a single taxable person. Incidentally, the Swedish court also considers the Swedish fixed establishment of Danske Bank to be non-autonomous. 

Skandia in the current practice 

The Skandia judgment has had a major impact on the VAT treatment of intracompany services. In practice, the positions taken by the various Member States with reference to Skandia are very different. In some Member States, Skandia has a far-reaching effect and almost all services between a VAT group and a fixed establishment or head office fall within the scope of VAT. 

The Dutch practice, however, is that the provision of services between a foreign head office and a fixed establishment in the Netherlands is not subject to Dutch VAT, even if the head office, the fixed establishment or both are part of a VAT group. This follows from case law of the Dutch Supreme Court (June 14, 2002, case no. 35 976). The Ministry of Finance has confirmed that Skandia will not change this. 

Practical consequences 

The question is to what extent the Danske Bank case will change the way the Skandia decision is implemented. If the CJEU rules that there are also two separate taxable persons in the Danske Bank case, this may mean that all intracompany services between fixed establishments will be in scope of VAT if at least one of the fixed establishments is part of a VAT group. 

The Danske Bank proceedings may also provide an opportunity, particularly in Member States where a broad scope has been attributed to Skandia. It is possible that the pattern of facts in Danske Bank leads to a different outcome than the Skandia case. The Skandia case concerned the purchase of IT services from outside the EU without VAT being charged. In that sense, the Danske Bank case is fundamentally different. In Danske Bank, an EU taxable person recharges the costs and does not directly make VAT savings on external IT services. This makes the case a lot more sympathetic. It is therefore possible that the CJEU will come to a different conclusion on these grounds. We recommend that you assess where Skandia may have too broad a scope and in those cases safeguard your rights. 

On the other hand, there are potential risks in Member States where the application of Skandia is currently limited. In particular, there is a risk that certain costs incurred by a group on which no VAT is currently paid, such as personnel costs, will be subject to VAT in the future. However, it is doubtful whether a decision in Danske Bank will actually have an impact throughout the entire EU. The effect of the Skandia judgment was limited in some Member States (such as the Netherlands) because their VAT group regime works in a different way. With Danske Bank this may once again be the case. Nevertheless, we recommend that you also assess the possible consequences of a broad scope of Skandia. 

If you would like to discuss this judgment in more detail, please feel free to contact the advisors from Meijburg & Co’s Indirect Tax Financial Services Group or your regular advisor.