A VAT business can be established in multiple countries for VAT purposes. In addition to the principal place of business (head office), there may also be branches (VAT fixed establishments) in other countries. As of 1 January 2024, the VAT treatment of supplies between the head office and VAT fixed establishments located elsewhere, will change from a Dutch VAT perspective. This applies to situations in which the head office and/or VAT fixed establishment is/are included in a VAT group This article discusses the change and its practical implications. We will also briefly outline the associated risks.
Danske Bank ruling
For VAT purposes, the starting point is that supplies between the head office and VAT fixed establishment are not subject to taxation. The reason for this is that both organisational elements are part of one and the same VAT business. In its judgement in the Danske Bank case, however, the Court of Justice of the European Union applied an important nuance to this starting point. Shortly put, it follows from this judgement that supplies between a head office and a VAT fixed establishment located in another EU member state are indeed subject to VAT if one is part of a VAT group (or if both are part of separate VAT group). In such cases, they can no longer be considered as a single taxable person, which means supplies between them are VAT-taxable supplies. The rationale behind this is that the link between the head office and VAT fixed establishment is broken by the territorial boundaries to which the VAT group is subject. They can therefore no longer be identified as one.
State Secretary’s Decree: changes from 1 January 2024
Some time ago, the State Secretary for Finance published a decree in which he incorporated the consequences of the European court judgement. We have previously informed you about this matter. According to the State Secretary, European VAT law should be interpreted as follows:
The starting point remains that supplies between the head office and a VAT fixed establishment are excluded from VAT because both are in principle part of one and the same VAT business.
There is an exception for cases in which the head office or the VAT fixed establishment is part of a VAT group in an EU member state. In that event, supplies between the two are subject to VAT.
Also, according to the State Secretary, previous Dutch Supreme Court judgements and previous regulations by the State Secretary on this matter have been rendered irrelevant by the aforementioned European Court judgement.
Consequences and risks in practice
An aspect of the decree worth highlighting is that it enters into effect from 1 January 2024. From that date on, the Dutch Tax Authorities will apply the State Secretary’s positions discussed above in its taxation and auditing duties. It is very important for internationally operating companies to adapt their administrations and systems in good time, where necessary. If the change resulting from the decree affects them, they will have to adjust their ERP configurations, invoicing and tax reporting, among other things. Various risks may arise with respect to this, including the following:
Certain supplies that previously fell outside the scope of VAT may be VAT taxable from 1 January 2024. This may affect matters such as invoicing and the preparation of correct VAT returns, both in the country in which the head office is located and that of the VAT fixed establishment;
In many cases, a reverse charge mechanism will apply to the supplies that become taxable once the decree enters into effect. Different requirements apply for the deduction of the reverse charge VAT, and there is the possibility that it may not even be deductible at all;
If businesses fail to implement the VAT changes, they may be subject to consequences such as additional tax assessments and default penalties. This also applies where reverse charge VAT is involved.
The VAT fixed establishment continues to develop
VAT law continues to evolve, particularly with respect to the interpretation and role of the concept of the VAT fixed establishment. It is therefore important to determine whether the tax position of each of your branches is correct and compliant with regulations.
Naturally, our VAT & Customs Advisory specialists would be happy to assist you in determining your business’ VAT position. If you would like more information, please contact Marisa Hut, Barthold Bergman or Marc van Weert.
Laws and regulations in this area may be subject to change. We recommend you discuss the impact of this matter with your Baker Tilly advisor.