On 11 March 2021, the Court of Justice of the European Union (CJEU) released its long-awaited judgment in the Danske Bank case. The case considers the VAT treatment of cross-border intra-entity services where the supplier head office is VAT grouped, but the customer branch is not.
The CJEU has held the principles set out in its earlier judgment in the Skandia case also apply to the reverse fact pattern (i.e. the so-called ‘Reverse Skandia’ principle applies). This means the services provided by Danske Bank’s VAT-grouped Danish head office to its Swedish branch should be subject to reverse charge Swedish VAT.
The judgment will impact the VAT treatment of intercompany services provided by members of a branch network. Although there has been implementation in some Member States of Reverse Skandia principles following the Skandia case, additional changes should be expected. The addition of VAT on these services is significant, particularly for Financial Services businesses, which cannot typically recover their VAT costs.
The CJEU released its judgment in the Skandia case in September 2014. Skandia tested the interaction of the treatment of intra-entity supplies (e.g. head office-to-branch, branch-to-branch, etc.) and VAT grouping. In its judgment, the CJEU held that a VAT group was a new and separate person, distinct from its members and that supplies into a VAT-grouped branch from an overseas head office (in Skandia’s case a US-headquartered entity) were subject to VAT.
However, the Skandia judgment did not explicitly consider the situation where the VAT grouped establishment was the supplier rather than the customer. Given the gap in the Skandia judgment, a further question was referred to the CJEU in the Danske Bank case.
Danske Bank, a Danish headquartered bank, provided IT services to its Swedish branch. Danske Bank (Swedish Branch) is separately registered for Swedish VAT, whilst its head office is part of a Danish VAT group. The Swedish Tax Authorities argued that Swedish VAT should be due on these, with Danske Bank (Swedish Branch) liable to self-account for VAT under the reverse charge mechanism. Given the continuing uncertainty around the application of Skandia principles, the following question was referred:
Does a Swedish branch of a bank established in another Member State constitute an independent taxable person where the principal establishment supplies services to the branch and imputes the costs thereof to the branch, if the principal establishment is part of a VAT group in the other Member State, while the Swedish branch is not a member of any Swedish VAT group?
In summary, the CJEU has followed the Skandia logic in its entirety.
A VAT group should always be treated as a taxable person in its own right. As the VAT group is distinct and separate from its constituent members, supplies between branches of the same legal entity are supplies for VAT purposes, where one or both establishments are locally VAT grouped.
The judgment also appears to conclude that VAT groups should be limited to a particular jurisdiction and that overseas establishments should not be considered members of that group. Under current Irish and also UK and Dutch rules, VAT groups are viewed as extra-territorial and overseas establishments of VAT group members are treated as members of a local VAT group.
The implementation of Skandia principles across the EU has been inconsistent and incomplete, creating a complex landscape. It will, therefore, be interesting to see how the Danske Bank judgment is interpreted and whether certain tax authorities such as the Irish Revenue which, to date, have not implemented Skandia, will now be required to revisit their position. The judgment could result in additional cross-border intercompany services becoming subject to VAT and financial services businesses will be particularly impacted by the judgment, given they cannot typically recover VAT on their costs in full.
The CJEU’s comments on VAT grouping’s territorial limitations are also relevant and businesses with VAT groups operating in jurisdictions which operate extra-territorial VAT groups such as Ireland (and also the UK and the Netherlands) will have to watch and wait to see if this judgment results in a change to their existing position. Businesses established in Ireland/Netherlands/UK should consider the potential for whether this judgment is likely to impact upon their current cross-border flow of charges.
EY can assist businesses understand the impact of this judgment in Ireland and across Europe.
For further information, please contact one of the following or your usual EY contact:
Eamonn McCallion Eamonn.firstname.lastname@example.org 012211648
Brian Keenan Brian.email@example.com 012212487
Aideen Farrell firstname.lastname@example.org 061449896