Important VAT changes for supplies between head office and fixed establishment
The Dutch Secretary of State for Finance recently announced an important change to the Decree on the fixed establishment (no. 2020-25513). This has significant consequences for the VAT treatment of cross-border supplies between a fixed establishment (branch(es)) and its principal establishment (head office), in cases where one or both of the parties are included in a VAT group registration. Businesses have until 1 January 2024 to adjust their systems and invoice flows. In this article, we will discuss this matter and explain why proper and timely preparations are important.
In current Dutch tax practice, businesses included in a VAT group are considered to be one single taxpayer. Supplies between a head office and its branch that is included in the Dutch VAT group, are not subject to VAT taxation. In the Danske Bank judgement of March 2021, the Court of Justice of the European Union (CJEU) gives a strict interpretation of the territorial limits of the VAT group. In addition to this, the CJEU ruled in the Berlin Chemie judgement of April 2022 that a subsidiary company in a different EU Member State is no longer necessarily a fixed establishment of the parent company. There is currently another case pending before the CJEU, and it is expected that the judgement in that matter will provide further guidance for the interpretation of the VAT concept of the fixed establishment. In other words, the concept of the fixed establishment in the context of VAT remains in flux.
What are the current changes?
According to the CJEU, a VAT group is a separate taxpayer that (for VAT purposes) is independent with respect to any foreign fixed establishment or a foreign head office. In accordance with this, the Secretary of State has altered the VAT decree on the following points:
- Supplies between a head office or fixed establishment in one EU Member State, and a head office or fixed establishment outside of that Member State, where one or both parties are part of a VAT group, are subject to VAT taxation.
- It is not possible to include in the VAT group in a particular Member State, any business outside of that Member State, nor the fixed establishment of a business that is established outside of that Member State.
Possible consequences and risks
These changes will have consequences for business structures with cross-border supplies between a head office and a fixed establishment, in cases where there is also a VAT group. In particular, companies and institutions that (in part) perform VAT-exempt supplies, such as banks, insurance companies, educational institutions and health care institutions, may face a restriction of their right to deduct input VAT. In the real estate sector, given the high stakes involved in real estate transactions, this will have an enormous effect on financing, among other things. Transactions within businesses that are established in different countries with a head office and fixed establishment(s) may be VAT-taxed as of 2024. Also, reverse-charged VAT may be due if a foreign establishment performs supplies to the Dutch head office, and vice versa. If the changes are not implemented correctly, VAT due might not be paid on time. This can lead to, among other things, late payment penalties.
What will the changes mean for you?
It is important to accurately analyse the possible VAT consequences and to prepare for them on time:
- Map your current VAT group. Which fixed establishments and head offices are included in the VAT group? What is the tax position of each establishment under the EU rules?
- Assess which transactions take place between the head office and the fixed establishment(s) in other EU Member States. How are supplies procured and passed on?
- Determine the impact of the changes to the business model. What are the financial consequences? This should provide you with an overview of the (new) invoice flows and insight into any necessary follow-up steps, such as changes to the business model and the internal (software) systems.
Avoid uncertainty, additional assessments and fines
Incorrect VAT qualifications can lead to additional assessments and significant fines. Be sure to prepare your organisation for the possible impact of the Decree, on time. Do you have any questions about this matter? Or would you like to discuss your specific business situation? Feel free to contact Marisa Hut or Marc van Weert. We would be happy to assist you!