VAT Grouping through a Head Office or a Branch - How does a Membership of a VAT Group Affect the Relationship between a Head Office and its Branch?

Abstract: In its ruling in FCE Bank, the CJEU stated that a supply between a head office and its branch does not constitute a taxable transaction since the head office, together with its branch, constitute one taxable person. Ten years later the CJEU ruled in Skandia America stating that the principle deriving from FCE Bank is not applicable when the branch is a member of a VAT group. This ruling generated many questions and uncertainties regarding the relationship between a head office and its branch and the concept of VAT grouping. The VAT Directive states that a taxable person is “any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity”. As the CJEU stated in FCE Bank, a branch is dependent on its head office, why a head office and its branch together constitute one taxable person. Thus, the question deriving from the ruling in Skandia America regards whether a head office and its branch can constitute two separate taxable persons just because the branch is a member of a VAT group. I am of the opinion that a branch cannot be separated from its head office when it regards the concept of a taxable person why a head office and its branch, irrespective of the circumstances, constitute one taxable person. A branch can neither be part of a VAT group independently from its head office since the branch does not constitute a legally independent person. I namely take the view that the branch and the head office do not seize to constitute one legal person just because the branch becomes a member of a VAT group. Moreover, since cross-border VAT grouping is a disallowed concept, neither the branch nor the foreign head office should be able to become members of a VAT group that is formed in the Member State of the branch. Furthermore, a supply of services constitute a taxable transaction if the establishment receiving the services is a legal entity separated from the supplier, since there otherwise is no supply made for consideration. Thus, for a supply made between a head office and its branch to constitute a taxable transaction, the branch has to, independently from its head office, carry out an economic business and bear the risk of the business. Since a head office and its branch constitute one legal entity, the branch does not, independently, carry out the economic activity and does not bear the economic risk of the business. Thus, the supplies made between a head office and its branch should not constitute taxable transactions. In Skandia America though, the CJEU did not discuss the concept of a taxable transaction, it merely just stated that the services supplied between the head office and the branch did constitute taxable transactions. Based on the above-mentioned, it is of importance to discuss the application of the ruling in Skandia America since the ruling generated many questions. Initially, it should be stated that the ruling should be applicable to all Member States of the EU since the ruling derives from the concept of EU law and the principles deriving there from. Moreover, all the Members States of the EU have to comply with EU law and shall not interpret a provision of the VAT Directive in a way that is contrary to the objective of the VAT Directive. The Member States therefore have to amend their legislation in accordance with the rulings of the CJEU. However, the intentions of the CJEU could not possibly be to drive the Member States to amend their systems of VAT grouping if it results in a legislative act that, in my opinion, is contrary to EU law. These conclusions are founded on the fact that the system of VAT grouping is a well-established concept throughout the EU and on the fact that the VAT Directive allows each Member State to, in a suitable way, choose how to introduce the concept of VAT grouping. Hence, the intentions of the CJEU could not have been to restrict this possibility, but just to avoid a situation of non-taxation. Thus, it would have been more legitimate, and in accordance with the EU law, to focus on the prevention of tax evasion and tax avoidance and the situation of non-taxation instead of the relationship between a head office and its branch and the possibility to become a member of a VAT group.