The Court of Justice of the European Union ("CJEU") has delivered its judgment in the case of Skandia America Corporation (USA), filial Sverige v Skatteverket (Case C-7/13). Going against the opinion of the Advocate General, the CJEU decided that supplies of services from a head office in a third country to its branch in a Member State are subject to VAT when the branch belongs to a VAT group.

The CJEU held that in these circumstances the supply is treated as made to the VAT group to which the branch belongs, rather than to the branch itself. In most cases, this will mean that the VAT group will be required to self-account for VAT on the receipt of the supply in its own jurisdiction.

The Skandia case involved VAT on the recharge of externally purchased IT services from Skandia America Corporation in the USA to its Swedish branch. The division of head office costs between subsidiaries and branches in this manner is a standard arrangement.

The CJEU's previous case law had held that transactions between a head office and its branches were outside the scope of VAT (because they were part of the same legal entity) and it was widely assumed that this also applied where the branch was a member of a VAT group.

Implications

The case involves the Swedish rules but a judgment from the CJEU applies in all Member States. It is most likely to be of concern to the insurance and financial services industries that commonly use such arrangements and are generally unable to recover all the VAT that they incur. However, the judgment could have ramifications for all businesses that have VAT group arrangements in any Member State which includes a branch or head office.

While Skandia re-supplied externally purchased IT services to its Swedish branch, the judgment should also apply to services created "internally" by the head office. In addition, while the CJEU did not consider the position where a head office in a Member State (as opposed to a third country) provides services to its branch in another Member State (or vice versa), it is likely that these will also be subject to VAT where the branch or head office belongs to a VAT group in its Member State.

Unfortunately, the CJEU did not grapple with how supplies between head offices and their branches should be valued for VAT purposes. Given that they are part of the same legal entity, contracts will not be in place between them and it may be difficult for a business to determine the correct amounts for any internal invoices if this is the basis for the charge.

Where neither the head office nor the branch belongs to a VAT group, transactions between them will continue to be outside the scope of VAT.