The European Court of Justice changes its stance on cost sharing
Today, the European Court of Justice has delivered three rulings on the VAT exemption for the supply of services by independent groups of persons to group members (also known as cost sharing). The European Court of Justice holds, among other things, that the VAT exemption does not apply to transactions in the financial sector. The rulings constitute a significant diversion from previous case law by the European Court of Justice and will also change the way the VAT exemption is applied in Denmark.
The VAT exemption for independent groups (cost sharing)
EU's VAT directive and the Danish VAT Act include rules exempting certain services that are supplied from so-called independent groups of persons to group members from VAT.
When a number of conditions are met, companies can form an independent group that shares the costs of supplying services to the group members. The VAT exemption of the services supplied to the group members can result in considerable VAT savings in a number of sectors.
The conditions of the VAT exemption are that the group members must perform VAT exempt activities, that the services supplied by the group must be necessary for the activities of the members, that the payments from the members to the group for the services only cover the group's expenses and finally that the VAT exemption is not likely to cause distortion of competition.
The VAT exemption is different from the rules concerning VAT groups, as the VAT exemption can also be used by companies that are not related group companies.
The "Taksatorringen" case
The European Court of Justice has previously approved the use of the cost sharing rules in the financial sector.
In the Danish "Taksatorringen" case, a number of insurance companies had formed an independent group and asked the Danish tax authorities for permission to use the cost sharing VAT exemption for certain valuation services supplied by the independent group (Taksatorringen) to the group members. The Danish tax authorities refused to approve the use of the exemption, stating that it would lead to distortion of competition.
The case was referred to the European Court of Justice which held in a ruling of November 20, 2003 (case C-8/01) that the use of the VAT exemption could be denied if there was a genuine risk that the exemption might give rise to distortion of competition.
After the ruling by the European Court of Justice, the Danish Supreme Court held in a ruling of May 19, 2009 that Taksatorringen was entitled to use the VAT exemption. Plesner represented Taksatorringen before the Danish Supreme Court.
The VAT exemption has been applied in the financial sector both before and after the Supreme Court's ruling.
The Danish tax authorities' practice must now be changed in light of the new rulings by the European Court of Justice.
The European Court of Justice's rulings of September 21, 2017
Today, the European Court of Justice has issued rulings in the cases C-326/15, DNB Banka, C-605/15, Aviva, and C-616/05, Commission v Germany. At the time of this newsletter, the cases are only available in Danish and English as provisional translation texts.
In all three rulings, the European Court of Justice has held that it follows from the structure and the general scheme of the VAT directive that the cost sharing VAT exemption is only applicable to independent groups whose members perform certain VAT exempt activities in the public interest such as the provision of medical case and the education of children and young people.
Therefore, the VAT exemption can no longer be applied by companies in the financial sector, including banks and insurance companies or by a range of companies with VAT exempt activities concerning shares and real estate.
In the rulings, the European Court of Justice has acknowledged that this interpretation constitutes a significant diversion from the Court's previous case law, namely the Taksatorringen case in which the Court of Justice did not address whether the VAT exemption was only applicable to companies with activities in the public interest.
Therefore, the European Court of Justice has decided that the new rulings should not apply retroactively.
Consequences for Danish companies
The new rulings by the European Court of Justice significantly changes the way the VAT exemption is applied in Denmark. Thus, a range of Danish companies will no longer be able to apply the cost sharing exemption.
The rulings by the European Court of Justice are expected to lead to an amendment of the Danish VAT Act to bring it into accordance with EU law. Additionally, the Danish tax authorities will likely issue an official statement over the comings months concerning the rulings.
This change of practice requires a number of VAT exempt companies to rethink the way in which they cooperate, so that their cooperation can continue in an optimal way from a VAT perspective.
Contact us for additional information about the rulings by the European Court of Justice and their implications for companies operating in Denmark.