September 22, 2014
The European Court of Justice held that the supply of services by a non-EU Head Office to a branch situated in the E.U. is now liable to VAT where that branch is part of a VAT group.
VAT grouping allows EU member states to treat two or more companies as a single entity for VAT purposes which means transactions between members of a VAT group are normally ignored for VAT purposes.
However, the ruling on this dispute between Skandia America Corporation and the Swedish Tax Authorities means that services previously deemed to be VAT exempt will now be subject to VAT rates of between 15% and 27%.
This decision is of particular relevance to the financial services industry since the products and services they sell (e.g. mortgages and insurance) are largely exempt from VAT. The ruling means they will now be unable to recover input VAT refunds within the EU resulting in additional costs for banks and/or insurers who have outsourced IT and other services.
- The non-EU head office purchased IT services from a third party and made those services available to its branch which was situated in an EU member state i.e. Sweden.
- The US head office charged the cost of those services to its Swedish branch with a 5% mark up.
- The Swedish branch then provided those IT services to users both within and outside the VAT group.
- The costs charged by the US Head Office to the Swedish Fixed Establishment were disregarded for VAT purposes.
- The Swedish Tax Authorities didn’t hold this view. Instead they believed the supplies between the US head office and the Swedish branch were liable to Swedish VAT.
- The Swedish Tax Authorities registered the US Head Office as a non established taxable person and raised an assessment for output tax on the supply of services to its Swedish branch.
- Skandia America Corporation appealed this assessment.
- The Swedish Tax Authorities defended its position stating that the branch was part of a VAT group and therefore a separate taxable person for VAT purposes.
- Skandia America Corporation relied on the FCE Bank Principles Case stating that a head office and its branch are part of the same legal entity and therefore no VAT can be due on the recharge.
- The Advocate General concluded that a branch could not be considered a VAT Group member independent of its head office because a branch is not deemed to be a taxable person distinct from the head office.
- On 17th September 2014, however, the ECJ held that VAT must be charged on services provided by companies by their overseas offices.
The consequences of this ruling will be substantially higher tax bills for financial services companies especially in the U.K. which is considered the “Global Financial Services Centre.”