The VAT grouping rules in Ireland (which are similar to the UK rules and allow non-taxable persons such as non-active holding companies to be members of a VAT group) do not infringe the VAT Directive, according to an advocate general ("AG") of the European Court of Justice.


The VAT Directive allows a member state to treat as a single taxable person any persons (established in the territory of that member state) who, while being legally independent, are closely bound by financial, economic and organisational links. This enables transactions between members of the same VAT group to be disregarded for VAT purposes. The aim of the directive is to simplify the administration of VAT and to tackle abuse.

EC v Ireland (C-85/11)

Irish law, similar to UK law, allows non-taxable persons (for example, passive holding companies, non-trading, dormant or shell companies, or companies acting as trustees) to be members of a VAT group. The European Commission argued that, while the word "taxable" did not appear in the relevant article of the directive, it was implicit.

The goal of administrative simplification could not justify the inclusion of non-taxable persons, since only taxable persons must file accounts and returns. In relation to abuse, the explanatory material to the 6th VAT Directive (the predecessor of the VAT Directive) only mentioned preventing exploitation of thresholds by economic operators by splitting a business into separate units. Moreover, a VAT group might consist solely of non-taxable persons. The AG dismissed this concern stating that supplies between non-taxable persons fall outside the VAT Directive irrespective of whether the persons are part of a VAT group.

In the AG's opinion, the inclusion of non-taxable persons in a VAT group is not contrary to the aims of the VAT grouping regime; it enabled appropriate business structures to be formed without negative consequences in terms of VAT and allowed member states to reduce the influence of VAT on the way that groups of companies organised themselves. The wording of the VAT Directive was clear and the extra word "taxable" should not be read into it. Elsewhere in the VAT Directive, the term "taxable person" was used to describe an entity engaged in economic activities, but it had not been used here, which might imply an intention to broaden the scope of those who may be included in a VAT group.

EC v Sweden (C-480/10)

The European Commission had also challenged the Swedish VAT rules because they limit the availability of VAT grouping to the financial and insurance sectors. The AG pointed out that it is optional, and not obligatory, for member states to allow VAT grouping but any national rules concerning VAT grouping must comply with the VAT Directive, which allows VAT grouping in all sectors, and this curbs the discretion of member states to include limitations. Restrictions are only justifiable in order to tackle potential abuse, which was not the case here. Therefore, to achieve a uniform approach amongst member states and because of the principle of equality, the AG found it not justifiable to limit VAT grouping to specific sectors.


The opinion in the case of Sweden is not surprising. The opinion in Ireland's case has been welcomed on the grounds of common sense and clarity. If the court, whose decision is expected later this year, follows the opinion, it will come as a relief to many groups who will not have to reorganise their structures to avoid VAT costs.