(German Federal Tax Court, 2 December 2015, V R 25/13) 

Under German VAT law, only corporations (e.g., AG, GmbH) are allowed to participate in VAT groups as controlled entities. This limitation contradicts EU VAT law. The reason for the limitation mainly was that German VAT law requests a domination of the controlled entities (subsidiaries) by the controlling entity (parent company) in a way that the controlling entity is able to implement its will in the controlled entities. If the controlled entities are corporations, a majority principle applies in respect of voting. Therefore, a domination can basically be achieved by holding a majority of voting rights in the subsidiary plus specific organizational measures.

In contrast, votes of partnerships are subject to a principle of unanimity. However, the German Federal Tax Court recently ruled that this contrast between corporations and partnerships does not justify a general exclusion of partnerships from VAT groups. The court decided that partnerships can participate in VAT groups if only the controlling entity and its financially controlled subsidiaries are parent companies of the partnership since in such cases the requested domination of the partnership by the controlling entity can be achieved as well.

The described change in German case law has a significant impact on German groups since (unlike in some other EU member states) it is not possible to elect for a VAT group in Germany. Instead, a VAT group is automatically formed as soon as all of the required integration requirements (financial, organizational and economical integration of the subsidiary into the parent company) are met.

The German Ministry of Finance will publish a circular which shall determine an implementation of the change in jurisdiction into German VAT guidelines for the tax offices in the near future. This circular should also determine a certain transitional period in which companies are still allowed to follow the former jurisdiction and exclude partnerships from VAT groups.