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The German tax group for VAT purposes is in need of reform – Landmark ECJ judgements

Two referrals by the Federal Fiscal Court (Bundes­finanzhof, BFH) brought before the ECJ the question as to whether or not the German regulation according to which it is not the VAT group as such but rather solely the parent/controlling company that is designated as the taxable person is actually in line with EU law. The ECJ, in its decisions of 1.12.2022, did not completely overturn the German regulations on tax groups but did demonstrate that there is a need for reform.

In its judgements of 1.12.2022 (cases.: C-269/20; C-141/20), the ECJ clarified that a Member State is able to designate a parent/controlling company as the taxable person who is liable for the VAT of the group as a whole. The reason provided for this was that tax groups simplify the assessment and collection of taxes. It is then irrelevant who fulfils the obligation of submitting returns and paying the tax, provided that this taxable person is in a position to impose their will on the other companies forming part of that group.

With regard to the criterion of financial integration, the ECJ reaffirmed its view that – contrary to German case law – a parent/subsidiary relationship is not absolutely essential for the formation of a single entity for VAT purposes. Furthermore, the ECJ stated that where there is ownership of a majority stake in the subsidiary company there is no additional need to hold a majority of the voting rights.

As regards the independence of a group’s subsidiary/controlled companies, in the arguments put forward by the ECJ it was still unclear whether or not exchanges of services between members of the group consolidated for tax purposes are indeed taxable. In the view of the Court, a group’s subsidiary/controlled companies, despite their integration, should be able to continue carrying out economic activities independently. This would result in a considerable additional burden for VAT groups in, for example, the hospital, care home and insurance sectors.

Moreover, the ECJ decided that a tax group also encompasses a parent’s/controlling entity’s non-economic activities or those carried out in the exercise of its powers as a public authority. This is significant insofar as public authorities are not entitled to deduct input tax and the non-taxability of intra-company services results in cost savings via the tax group.

Please note: The subsequent BFH rulings based on the ECJ judgements and any changes to the German legal position remain to be seen.

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