The case concerns the VAT treatment applicable to services charged by the foreign office of a company to its branch based in Sweden which is a member of a "VAT group" formed with others entities.
As a reminder the "VAT Group" is a concept that allows to consider all of its members as a single person for VAT purposes, so that supplies of goods and services between them are treated as internal operations.These operations are therefore not subject to tax, similarly totransactions between a headquarters and its branch. It is also worthwhile noting that Member States are free to implement the “VAT grouping” in their legislation and that France has not exercised this option for the moment, probably by fears of potential abuse, preferringtwo other vehicles, which the scope are however more limited:
- A costs sharing mechanism, defined by Section 261 B of the CGI, for group of non-taxable bodies and businesses that allowsto exempt from VAT, reimbursements of expenses made at costbetween members ;
- A system of "VAT pooling" that allows to offset the VAT debts and VAT credits hold by the different companies of the same group (Article 1693 ter and 1693 art. ter of the CGI) in order to limit VAT cash flows.
In Sweden where the concept of VAT group has been implemented, the combination of the said VAT group with the fact that services charged by a headquarter to its branch are not taxable supplies, allowed, according to the company, to import services from abroad without paying any VAT because all supplies should be considered as internal operations.
The Court of Justice did not follow that reasoning, considering that, sinceVAT group was a separate person for the purposes of VAT, the headquarter could not consider its relationship with its branch as an internal relationship. According to the Court "it follows that in such a situation, the services supplied by a third party for a member of a VATgroup must be considered, for the purposes of VAT, as having been made not in favor of this member but to the VAT group itself to which itbelongs”. As a consequence to the tri-partite headquarter- branch-grouprelationship, the Court substitutes a bipartite relationship where the branch is disregarded and where the foreign headquarter enters into a direct contact with the VAT group. Therefore, according to the Court, VAT was applicable to the service.
If the VAT group concept does not exist in the French VAT legislation, the solution is not without interest to us. It is probably applicable to groups of non taxable persons ruled by Section 261 B of the CGI as well to silent partnerships, that have no legal existence but a tax personalitydistinct from the tax personality of their members and shareholders. It is also a firewall against the abusive effects of "VAT group" and as such, itcan help to reduce the reluctance of France towards this concept which is an important simplification tool for businesses.