The Court of Justice of the European Union (CJEU) issued its decision in the Danske Bank case (case C-821/19) on 11 March 2021, ruling that services provided by a Danish head office to its fixed establishment (branch) in Sweden fall within the scope of VAT if the head office is part of a foreign VAT group and the branch is not part of that group. The decision may have significant consequences for the VAT treatment of intra-group transactions where a business has branches operating in several EU member states and the head office is part of a VAT group.
The questions that the CJEU had to answer in Danske Bank arose from its 2014 decision in the Skandia case (case C-7/13). At issue in Skandia was the VAT treatment of services supplied by a head office in the U.S. to its branch in Sweden that was part of a Swedish VAT group. The CJEU held that services provided by the overseas head office to its branch were VATable transactions because the Swedish VAT group is considered a separate taxable person, even though the U.S. head office and the Swedish branch are part of the same legal entity. In issuing its decision in Skandia, the CJEU left open the question of the tax treatment that would ensue had the head office, rather than the branch, been part of a VAT group.
Danske Bank is headquartered in Denmark and conducts banking services in Sweden through a Swedish branch. The head office of Danske Bank was a member of a VAT group in Denmark (the Swedish branch did not belong to a VAT group). A Danish VAT group only may be set up with undertakings that are established in Denmark; a nonresident may not be part of such a group unless it is a fixed establishment in Denmark.
The head office incurred costs for an IT platform that was used by all branches of the bank and it charged a proportion of these costs to the Swedish branch. The question arose as to whether the Danish head office and the Swedish branch were two separate taxable persons for VAT purposes because the head office was a member of a Danish VAT group (i.e., whether the services supplied by the overseas head office to the Swedish branch should be ignored because the head office and the branch are part of the same entity or whether the services are subject to VAT).
CJEU decision
The CJEU concluded that services between a head office and a branch are subject to VAT if there is a legal relationship between the supplier and the recipient in which there is reciprocal performance. In absence of such a relationship, the services constitute nontaxable internal flows between one and the same person. To determine whether a legal relationship exists, it is necessary to ascertain whether the branch performs an independent economic activity and bears the economic risk arising from its business and whether the branch or the head office belong to a VAT group in their member states of establishment.
In keeping with the rationale expressed in the Skandia decision, the CJEU held that the head office, which is part of the Danish VAT group, cannot be the same taxable person as the Swedish branch due to the territorial limitation of the VAT group regime. Based on this reasoning, the services rendered by the Danish head office to the Swedish branch are taxable supplies subject to VAT.
The Danske Bank case is of considerable importance to businesses that are operating via branches in different EU member states and participating in a VAT group, especially if the right to recover VAT is limited (e.g., financial services businesses).
The CJEU has confirmed that when transactions take place between a head office and a branch, VAT group status must be taken into account. If VAT grouping is territorially limited, a head office and a branch should be considered separate taxable persons for VAT purposes. Another consequence of the Danske Bank case is that member states may change their approach to foreign VAT grouping.
Businesses operating via branches in different member states should consider examining whether the CJEU decision in Danske Bank impacts the VAT treatment of supplies between a head office and its branches.
Johnny Lundberg
johnny.lundberg@bdo.se
Madeleine Merkx
madeleine.merkx@bdo.nl