The ECJ has ruled that the VAT exemption for cost sharing groups cannot be applied in the banking and insurance sector. Businesses that operate in these sectors and relied on this VAT exemption to mitigate VAT leakage will likely face an additional VAT burden.

Under certain conditions, services provided by cost sharing groups (CSGs) to their members, whose activities are VAT exempt or out of scope of VAT, can benefit from a specific VAT exemption (the CSGs scheme). In three recent rulings, the ECJ has provided further guidance as to the scope and conditions of the CSGs scheme.

The CSGs scheme had previously been understood to cover services provided by CSGs to their members that are directly necessary for the VAT exempt activities of these members, regardless of the type of activities conducted by the members. However, according to the ECJ the CSGs scheme is limited to CSGs whose members conduct activities in the public interest (e.g. healthcare, education). This means that the CSGs scheme cannot be applied in the banking and insurance sector.

The rulings have far-reaching consequences for the application of the CSGs scheme. It remains to be seen whether and to what extent member states should first amend their domestic legislation before the rulings can be applied in practice.