The case was triggered by a decision by the Swedish tax authority to charge VAT on the supplies of IT services from Skandia America Corporation in the US to its Swedish branch.
The costs of the services provided by the US head office were disregarded for VAT purposes on the basis that it was the same legal entity. The Swedish branch then supplied those services onwards to other group companies without charging VAT.
The CJEU concluded that the services supplied by a company to a branch belonging to a VAT group must be regarded as being supplied to the VAT group and not to the branch. As the branch was the member of a VAT group, the branch could no longer be treated as being the same legal entity as its US head office for VAT purposes. The creation of the VAT group established a new entity, for VAT purposes. As the company and the VAT group cannot be considered a single taxable person, the supply of such services constitutes a taxable transaction. This means that a branch within a VAT group operating in a member state will be subject to VAT on receipt of services from a non-EU head office.
The case significantly expands the VAT net for financial services firms. Banks and insurance companies will now be required to charge VAT on services provided to EU based branches by their overseas head offices based outside the EU. As these companies typically provide VAT exempt services, this will result in a significant additional cost as the branch will be largely unable to recover any VAT which they incur.
The Revenue Commissioners currently treat charges from a foreign head office to an Irish branch in a VAT group as outside the scope of VAT. This ruling means that these previously VAT free services could potentially be subject to VAT at 23%, which will in most cases be irrecoverable. We expect that the Revenue will take some time to consider the impact of the ruling and will engage with financial services industry bodies before issuing guidance on how Ireland will implement the judgment.
The ruling will particularly affect financial services companies that have an Irish branch in a VAT group and are not entitled to full input VAT recovery. However, we would recommend that any financial services groups with branches in Ireland or any other member state should carefully monitor developments and begin considering options to alleviate any potential impact the ruling may have on their current VAT grouping structures.