VAT

Is VAT payable in 2024 on transactions within the legal entity?

Aiki Kuldkepp
By:
insight featured image
The Netherlands changes its policy from 1 January 2024. Transactions within one legal entity will no longer be outside VAT scope if the head office or its foreign establishments belong to a VAT group within the EU. The article highlights the changes and explains what the changes mean for businesses.
Contents

Why this change in the Decree on the Fixed Establishment?

On 5 July 2022, the Dutch Ministry of Finance announced an important change to the Decree on the Fixed Establishment (hereafter; ‘Decree’). The Decree No. 2022-13545 of 1 July 2022, which amends Decree No. 2020-25513 of 17 December 2020, was published in Official Gazette No. 16197 (in Dutch only).

The Decree has been amended to bring it in line with the decisions of the European Court of Justice (CJEU) in the cases Skandia (C-7/13) and Danske Bank (C-812/19). In those decisions, the CJEU held that EU VAT grouping has territorial limits and services provided between a head office (HO) and a fixed establishment (FE) are within the scope of VAT if the HO or/and FE belong to a VAT group.

The amended Decree states that supplies between a FE and a HO remain outside the scope of VAT if none of them is part of the VAT group of one of the EU Member States (MSs).

ECJ rulings determine new policy

Supplies within one legal entity are generally outside VAT scope

The CJEU ruled in the case FCE Bank (C-210/04) that provision of services between HO and its FE were outside of scope of VAT. In Morgan Stanley (C-165/17), the CJEU confirmed that a FE and HO are to be treated as a single taxable person, and any transactions between the entities are outside VAT scope.

Supplies within one legal entity are within VAT scope if one or both establishments belong to a VAT group

The CJEU decided in its decisions in Danske Bank (C-812/19) and Skandia (C-7/13) that if a FE and/or HO are part of the VAT group, then they should be treated as separate taxable persons. The CJEU held that EU VAT grouping is limited to one EU MS and its membership cannot be extended to persons established in other MSs. Consequently, transactions between a HO and its FE are within the scope of VAT if either the HO or the FE or both are a member of a VAT group in the EU.

For example, services provided by a HO to its branch who is a member of a VAT group must be considered provided to the VAT group. Because the branch belongs to the VAT group, the HO and its branch cannot be considered to be a single taxable person. Because the branch belonging to the VAT group is a separate taxable person to its HO, the transactions between them cannot be disregarded for VAT purposes. Any services provided between the HO and its branch consequently fall within the VAT scope.

Current position in the Netherlands

Up to now, the Netherlands has not applied the principles introduced by the CJEU in Danske Bank and Skandia. In the Netherlands, not only a local establishment but the entire legal entity (i.e. the HO including its FEs) belong to the VAT group. For example, when a Dutch FE belongs to the Dutch VAT group, then its HO established abroad also belongs into the Dutch VAT group. When a Dutch HO belongs to the Dutch VAT group, then its FEs established abroad also belong into the Dutch VAT group. Provision of services between the FE/HO belonging to the Dutch VAT group and its HO/FE established abroad are consequently outside of VAT scope. The same approach currently applies if the business involving foreign establishments belongs to the VAT group of another MS. It is therefore possible under the current rules to consider the supplies between HO and its FEs outside of the VAT scope even if one or both of them belong into the VAT group.

The Dutch position after 1 January 2024

However, the above is only possible until 1 January 2024. The Decree of 1 July 2022 introduces the following changes to the Dutch approach:

  • Transactions between a HO and its branch/FE will no longer be outside of the VAT scope after 1 January 2024 if either a HO or its branch/ FE or both belong to a VAT group within the EU.
  • This only applies if the VAT group concerned is established in one of the MSs. In case both establishments are not part of a VAT group of any of the MSs, transactions between them will remain outside the scope of VAT.
  • The Decree only applies to the supplies between HO and its FEs. The VAT treatment of transactions taking place within other structures (such as between FEs/branches or more broadly between establishments of the same legal person) are not explained in the Decree but the principles of the territorial applicability of the VAT grouping introduced by the CJEU are also expected to apply to them. This means that the supplies within the same legal entity may fall within the VAT scope if the HO of this legal entity or any of its FEs is part of a VAT group in the EU.

What are the consequences for you?

Transactions between a HO and its branch will no longer be outside the scope of Dutch VAT if either the HO or the FE/branch is part of a VAT group in the Netherlands or another MS. This means that the VAT may be applicable on such supplies. The HO or FE may become liable for (non-deductible) VAT (i.e. the so-called reverse charge applies) a if a FE or HO in another MS provides any services or re-charges the costs to the Dutch HO or FE.

This has major consequences because it means that the (reverse charge) VAT may be applicable on cross-border supplies of services between a HO and its FE. For (partly) exempt businesses it means that the input VAT that becomes payable may not be deductible.

If no EU VAT groups are involved, then transactions between HO and its FE/branch will remain outside the scope of VAT, applying the CJEU’s decisions in FCE Bank and Morgan Stanley.

How do you prepare for this?

The changes will have major consequences for business structures with cross-border transactions between a HO and a FE and more broadly within one legal entity, in cases where there is an EU VAT group involved. If any of the establishments are in a VAT group within the EU, then they will be treated as separate taxable persons under the new Dutch rules. The transactions between them will fall within the scope of VAT after 1 January 2024.

Businesses need to analyze whether any VAT consequences arise from the change if they have transactions that take place between various establishments of the same legal entity. For (partly) exempt businesses it means that non-deductible VAT may become due on re-charges within one legal entity. Other businesses may also be affected if they have structures described above. Changes may be due in reporting and compliance obligations. The updates in ERP systems may be required.

Affected businesses should begin to map the transactions and re-charges between their various establishments and to identify the VAT implications of the changes.

How do you avoid paying too much VAT?

  1. It may be possible to modify the group structure to optimize the VAT treatment, for example, by having services purchased directly by an HO or its FEs or partly by the HO and partly by FEs.
  2. If the place of supply is in another MS which does not yet apply the principles of Skandia and Danske Bank, then it is possible that no VAT is due. However, most of the MSs have already taken or are currently taking actions to bring their legislation in line with Skandia and Danske Bank decisions. Therefore, it is important to check the VAT rules of other MSs involved.

More information?

The amended VAT implementation policy is a difficult matter. Do you have questions or do you want to make sure you are well prepared for the new policy? Please contact one of our VAT specialists. They have international knowledge and work closely with specialists of other members of Grant Thornton International Ltd. They therefore know what policies apply in the different countries.