Supplies between a head office and fixed establishment no longer out of VAT scope?
Wouter Kolkman and Jesse Peeters of DLA Piper analyse the significant impact that an amendment to the Dutch fixed establishment decree and CJEU case law could have on businesses.
The VAT treatment of charges between a branch and head office has been a debated topic in recent years. On July 5 2022, the Dutch secretary of finance amended the Dutch VAT fixed establishment decree (Besluit Omzetbelasting, vaste inrichting, or the ‘Decree’) in the wake of the Court of Justice of the European Union (CJEU) cases Skandia (C-7/13) and Danske Bank (C-812/19).
The amendment entails that, effective from January 1 2024, supplies between a head office and its fixed establishment may no longer be out of the scope of VAT. The impact of recent CJEU case law and the Decree amendment is discussed in more detail below, as well as the broader impact the amendment could have on businesses operating in the Netherlands and other EU member states.
Amendment of the Dutch decree
In recent years, the Dutch government consistently applied a policy under which transactions within a legal entity were not subject to VAT. This policy was based on a Dutch Supreme Court decision in 2002.
The decision states that transactions within a legal entity cannot be subject to VAT if the foreign legal entity is part of a Dutch VAT group. According to the state secretary of finance, the case law from the Dutch Supreme Court can no longer be followed in light of the Skandia and Danske Bank cases. Therefore, the Dutch government issued an amendment to the Decree that entails the following changes:
As a general rule, supplies between a head office and branch are (still) not subject to VAT as the branch and head office constitute a single taxable person.
The general rule does not apply if a foreign branch or head office is part of a VAT group in an EU member state. In this case, the supplies between a head office or branch (being part of a VAT group) will be subject to Dutch VAT.
The concept of VAT group contains a territorial limitation that implies that only legal entities that have been established in the Netherlands or Dutch branches of foreign legal entities can be included in a Dutch VAT group. For the sake of completeness, the head office of a non-Dutch-established legal entity can no longer be part of a Dutch VAT group.
Impact of the amendment
The amendment of the Decree may have a significant impact on businesses that operate in the Netherlands. The Dutch policy, as enacted in the Decree, that states that supplies between a head office and branch are not subject to Dutch VAT will no longer apply.
Furthermore, foreign legal entities and their Dutch branch can no longer both be part of a Dutch VAT group. As the policy change will enter into force as of January 1 2024, businesses still have some time to assess the impact of the Dutch policy changes on their business, and (re)structure accordingly.
Considering that the supply of services by a head office to a branch could become subject to VAT, this may trigger an obligation for the head office and/or branch to register locally for VAT purposes. Furthermore, the supplier of the services must include VAT-able services rendered to its branch in its VAT return and may even be required to submit additional VAT filings (for example, EC sales listings). Finally, businesses may need to update their invoicing systems and ERP systems at the level of the head office and branch. In this respect, the question would need to be raised on the amount of costs attributed to the branch.
Conversely, for some businesses the amendment of the Decree may be beneficial as support services to branches will now be considered as VAT-able revenue. Where certain costs become VAT-able, this would affect the pro rata applied by the branch and/or head office, as the case may be. The taxable persons that provide said services may increase their VAT deduction right and improve their VAT-able position overall.