Is the VAT group regime teetering on the edge?
VAT groups under German national law
Section 2(2) no. 2 UStG includes a legal definition of a tax group for VAT purposes. According to that, a commercial or professional activity is not deemed to be performed independently if, within the actual overall circumstances, a legal entity is integrated financially, economically and organisationally into the business of the tax group’s parent company. In view of the underlying EU law, partnerships can now also be recognised as subsidiary companies if certain conditions are met.
The legal consequences of the VAT group regime consist in, in particular, the subsidiary companies being treated as legally dependent parts of the undertaking and the tax group’s parent company being liable for the VAT for the entire group of companies consolidated for tax purposes.
Preliminary ruling proceedings initiated by the BFH
Both sets of preliminary ruling proceedings (case C-141/20 and C-269/20) address the legal issue of whether, under EU law, the underlying authorisation to establish a consolidated tax group requires the entirety of the subsidiary companies (also referred to as the ‘VAT group’) to be treated as being liable to pay tax, or whether it is also permissible – as in Section 2 UStG – to treat one of the subsidiary companies as being liable to pay tax.
In one of the two sets of the initial proceedings (case reference: V R 40/19), the BFH explicitly dealt with, among other things, the potential fiscal implications of the German provisions constituting an infringement of EU law. In such a case – which would be the most disadvantageous for the German fiscal authorities – the tax group’s parent company could then specifically defend itself against tax assessments that have been previously been issued and are binding upon it, while a tax assessment that is binding upon a fictitious taxpayer (the ‘VAT group’) as well as upon the group’s subsidiary companies would not be possible owing to the absence of an existing legal basis.
Opinions of the Advocate General
The Advocate General made it perfectly clear in her opinions, which were published on 13.1.2022 and 27.1.2022, that she deems the provisions on VAT groups under Section 2 UStG to be contrary to EU law. She countered the suggestion from the BFH that there could be significant tax revenues losses – which was understood to be a ‘warning’ – by stating that Germany has had sufficient time “in order to remedy the problems identified regarding its VAT group regime”.
The Advocate General furthermore argued that the members of a ‘VAT group’ should remain independent taxpayers and have to submit their own tax returns. This implies that intra-group sales would also possibly have to be treated as taxable supplies.
The potential ramifications
It is not possible to predict what the ECJ will decide in these proceedings. It does indeed frequently follows the arguments put forward by the Advocates General, yet this is however not necessarily always the case.
From the present point of view, it is likewise completely uncertain what consequences would arise should the ECJ rule that the current VAT group regime is incompatible with EU law, something which is quite within the realms of what is possible. If the fiscal authorities were to face the threat of tax revenue losses then they would undoubtedly pull out all the stops in order to minimise these losses.
Recommendation: In order to secure the potential advantages that would arise from a judgement by the ECJ, all tax group parent companies should check if it makes sense for tax periods that are currently still open to continue remaining procedurally open until there is clarity about the ECJ judgement and its consequences.