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Partnerships as controlled companies in a consolidated tax group (for VAT purposes)?

In a recent ruling, the ECJ came to the conclusion that the opinion held, up to now, by the Federal Fiscal Court (Bundesfinanzhof, BFH) on the classification of partnerships as consolidated VAT groups is not compatible with EU law.

In the case in question a GmbH & Co. KG [German limited partnership with a limited liability company as a general partner] (a controlled company) wished to form part of a consolidated VAT group with M-GmbH [German private limited company] (the parent company). Besides the general partner GmbH, several natural persons and M-GmbH held stakes in the KG. According to the partnership agreement, each partner had one vote and M-GmbH had six votes. Resolutions - apart from some exceptions - were passed with a simple majority. The KG was of the opinion that a tax group relationship existed between it and M-GmbH. The local tax office disagreed, with reference to BFH case law, on the grounds that financial integration of the KG was not possible because several natural persons had stakes in the partnership. As the tax court had doubts as to whether BFH case law was compatible with EU law, the matter was referred to the ECJ. 

The ECJ, in its ruling from 15.4.2021 (C-868/19), disagreed with the opinion of the BFH and ruled that the condition of the existence of close ties through financial relationships should not be interpreted restrictively. The Directive on the VAT System does not indicate that persons who are not taxable may not be integrated into a consolidated VAT group. Instead, the criteria applied here should be identical to those for legal persons.

The ECJ reasoned that a subordination relationship admittedly generally allows the presumption that there are close connections between the persons in question. However, in principle, this cannot be regarded as a necessary condition for the formation of a consolidated VAT group. In the case in question, M-GmbH was able to enforce its will at the KG by majority decisions. Close ties could be presumed to exist through financial relationships. The mere fact that the KG’s partners could, theoretically, amend the partnership agreement through verbal agreements so that, in the future, resolutions would have to be passed unanimously is not sufficient to rebut this presumption. Excluding a partnership from a consolidated VAT group does not arise from the conditions contained in the Directive on the VAT System with respect to the existence of close ties through financial relationships.

Please note: Companies will now be able to refer to the case-law of the ECJ that could potentially be more favourable for them.

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