Provision of services by a head office to a foreign branch is VAT taxable

The Court of Justice of the European Union (CJEU) recently ruled in the Danske Bank case (no. C-812/19) that services which a principal establishment (head office) provides to a branch (fixed establishment) in another EU Member State, are VAT taxable if the head office belongs to a VAT group. In this article, we will discuss the case and its practical relevance.

The facts and the dispute

Danske Bank has its head office in Denmark, and as such belongs to a VAT group there. Danske Bank also has a branch in Sweden. The Danish VAT group supplies IT services to the Swedish branch. The dispute concerns the question of whether the branch should be designated as an independent taxable person, and whether said services are VAT taxable.

Judgement of the CJEU

First of all, the CJEU determines that a service supplied by a head office to a branch in another EU Member State is taxable only if there is a legal relationship between the provider and the recipient of the service, and services are performed between these parties (reciprocal performance). This is not the case if, together, they form a single taxable person. In such cases, reciprocal performance constitutes non-taxable internal flows of funds (cf. the judgement in the FCE Bank case, no. C-210/04).

An important fact in the Danske Bank case is that the head office in Denmark belongs to a VAT group in that country. The CJEU notes in this regard that the legal concept of a VAT group contains a territorial limitation, meaning that the branch in Sweden cannot be a part of the Danish VAT group. The head office and branch cannot be considered to be a single taxable person, which means that the services supplied between the two constitute VAT taxable transactions.

Practical relevance

What is noticeable about this judgement of the CJEU, is that the VAT treatment of (group) services between the head office and branch depends on the question of whether one of the two belongs to a VAT group. This, in part, already followed from the Skandia case (no. C-7/13), in which an entrepreneur established outside of the EU had a Swedish fixed establishment which was a member of a VAT group in Sweden. The Dutch Tax Authorities have always held the position that that judgement does not affect Dutch tax practice. In principle, services between a head office and a branch are, after all, not taxable if one of the two is included in a Dutch VAT group. This starting point was recently reiterated in the Besluit Vaste Inrichting (Decree Fixed Establishment, Staatscourant 2020, 62975). Until further notice, businesses can continue to rely on this Decree.

It is uncertain how other EU Member States will interpret the CJEU’s judgement in the Danske Bank case. In our view, it is quite possible that they too will deem services between a head office and branch to be VAT taxable, if one of the two belongs to a VAT group. Also, we cannot rule out the possibility that the Secretary of State for Finance may at some point change his views on the matter, as a result of this judgement.

Do you have any questions about this case, or do you need advice with regard to the VAT treatment of services within your group? Please feel free to contact Jayant Rakhan (+31 (0)6 12 02 41 49), Rakesh Ghirah (+31 (0)6 11 87 19 74), or Govinda Kandhai (+31 (0)6 13 26 03 98).