Banks, insurers and other financial services companies across Europe face additional VAT costs following a Court of Justice of the European Union (CJEU) judgment on 17 September 2014.
The CJEU ruling relates to a case between Skandia American Corporation, the US arm of the insurer, and the Swedish tax authority (Skandia America Corporation (C-7/13)). The case was triggered by a decision by the Swedish tax-authority to charge VAT on the supply of IT services from Skandia America Corporation in the US to its branch in Sweden.
The cost of services provided by the US head-office to the Swedish branch was disregarded for VAT purposes. The Swedish branch then supplied those services onwards to other group companies without charging VAT. The Swedish tax-authority argued that the branch was a taxable person that was separate from the rest of the group as it was economically controlled by the US headquarters, and that it should therefore be charged VAT.
The CJEU decided that, for VAT purposes, the services supplied for consideration by a non-EU company to its branch that belongs to a VAT group must be regarded as being supplied to the VAT group and not to the branch. As the branch was the member of a VAT group, the branch could no longer be treated as being the same legal entity as its US head-office for VAT purposes.
Instead, the CJEU considered that the creation of the VAT group established a new entity for VAT purposes. As the company and the VAT group cannot be considered to be a single taxable person for VAT purposes, the supply of such services constitutes a taxable transaction. This means that where a VAT group receives services into a branch within the VAT group from the branch’s non-EU head office, that service should now be subject to VAT.
This decision impacts the current VAT law, which allows EU member states, at their discretion, to treat companies and their overseas branches as a single taxable person for VAT purposes. Banks and insurance companies will now be required to charge VAT on services provided to EU-based branches by their non-EU head-offices. As these companies would typically provide VAT-exempt services to their branches, this could result in a substantial additional cost as they will be largely unable to recover any VAT that they incur.
The Irish Revenue currently treats charges from a foreign head-office to an Irish branch in a VAT group as outside the scope of VAT. The ruling means that these previously VAT-free services could now potentially be subject to VAT at 23%, which will in most cases be irrecoverable.
Tax authorities in EU member states will now consider how the CJEU’s decision impacts their local tax-legislation and how the decision should be implemented. There will be some uncertainty for the financial-services sector while the member states interpret the ruling.
We expect that the Irish Revenue will take some time to consider the impact of the ruling, and is likely to engage with financial-services industry-bodies before issuing guidance on how Ireland will implement the judgment.
The ruling is particularly likely to affect financial-services companies that have an EU branch in a VAT group that is not entitled to full input VAT recovery. Any financial-services groups with branches in Ireland (or any other member state) should carefully monitor developments. In the meantime, it would be sensible to begin considering options to alleviate any potential impact the ruling may have on their current VAT-grouping structures. Companies should, for example, examine their VAT-grouping arrangements, and review the range and scale of services they are buying in from outside the EU. Some may opt to change their existing structures as a result of this ruling.