On September 21 2017, the Court of Justice of the European Union (CJEU) held that the banking, financial and insurance sectors cannot benefit from the VAT exemption granted to services provided by an independent group of persons (IGP).
Article 132.1.f) of the EU VAT Directive provides a VAT exemption for services rendered by an IGP to its members when the members are engaged in VAT-exempt activities (e.g. banking, insurance and financial activities) and/or non-business activities (e.g. not-for-profit or public interest activities). One of the requirements to qualify for the IGP exemption is that the services provided by the IGP must be directly necessary for the members’ activities. In practice, this includes services such as administrative, accounting and IT services. The IGP thus allows the centralising of these types of services between members to benefit from an economy of scale without being applicable to VAT.
The IGP exemption has been widely used by the banking, financial and insurance sectors by setting up multiple IGPs in various EU member states, including Luxembourg. The CJEU held that the IGP exemption can apply only to services from IGPs whose members undertake an activity in the public interest, as defined in the VAT Directive. Services supplied by an IGP whose members undertake an economic activity in the financial or insurance sector are not entitled to the exemption. The CJEU decision to exclude these sectors from the benefit of the exemption came as a surprise.
Hopefully, the scope of the VAT grouping article in the VAT Directive (Article 11) is sufficiently broad to allow member states to consider as a single taxpayer legally independent persons linked by economic, financial and operational links. Several member states have adopted a VAT grouping regime (e.g. Austria, Belgium, Germany, Ireland, the Netherlands, Spain, the UK, etc.), but France and Luxembourg have not. It is worth noting that even in member states that allow a VAT grouping, the IGP is used by the financial sector, and some taxpayers, in practice, use both regimes.
The VAT unity has broader application than the IGP exemption because any person, regardless of its activities, can be part of a VAT group and all supplies of goods and services between the group members fall outside the scope of VAT, not only “directly necessary” services. However, the territorial scope of application of a VAT group is limited because only persons established in a same member state can be members of a VAT group. By comparison, before the CJEU decision, it was possible to have cross-border IGPs.
Considering the significant restriction on the scope of application of the IGP regime, EU member states that have not yet implemented a VAT grouping regime should consider introducing a regime with flexible rules for taxpayers and the tax administration alike. They should also allow a reasonable transition period to allow economic operators to adapt to the consequences of the CJEU decisions.
In the longer-term, the EU may wish to consider amending the VAT Directive and including a revised IGP regime that would apply on a cross-border basis and be available for the banking, financial and insurance sectors.
This article was written by Raphaël Glohr, partner, and Michel Lambion, director, of Deloitte Tax & Consulting Luxembourg.
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