Following a referral by the German Federal Fiscal Court, the ECJ ruled on December 1, 2022 (Rs C-141/20 and Rs C 269/20) on the German rules on fiscal unity for VAT purposes. We present the two rulings and provide an initial assessment.
I. Kiel Tax Office vs. Norddeutsche Gesellschaft für Diakonie
According to the judgment in Rs C-141/20, the second subparagraph of Article 4 (4) of the Sixth Directive does not preclude the German regulation on the sole tax liability of the controlling company of a VAT group (umsatzsteuerliche Organschaft) if that controlling company is able to enforce its will on the other members of that group and provided that this provision does not lead to a risk of tax losses.
The ECJ justified this decision with the fact that this regulation of the relevant EU directive is not to be interpreted restrictively.
Furthermore, the ECJ confirms that the German regulation according to which the controlling company of a German fiscal unity is the sole taxable person of this VAT group is not contrary to EU law. All rights and obligations of the fiscal unity are rightly borne by the controlling company as the representative of the VAT group. However, according to § 73 of the German Fiscal Code (Abgabenordnung, AO), the tax authorities are safeguarded against the liability of the controlled companies for taxes of other members of the fiscal unity, including the controlling company.
In answering the third question referred for a preliminary ruling, whether the controlling company must also have a voting majority in addition to the majority shareholding in a controlled company in the case of financial integration, the ECJ also does not recognise any restrictive interpretation of the relevant EU Directive. The fight against tax evasion or avoidance does not in principle require that the voting majority is a prerequisite of financial integration within the meaning of the relevant EU Directive in addition to the requirement of a majority shareholding and therefore it cannot be required under German VAT law either. Consequently, the additional requirement of a voting majority in addition to the majority shareholding for financial integration would not be in line with the interpretation of EU law. However, it remains decisive that the controlling company is in a position to enforce its will on the controlled companies. In this context, the ECJ has also clarified that a fiscal unity may not be limited to cases of superordination and subordination.
In answering the fourth and last question referred, the ECJ stated that a controlled company does not lose its independence due to its participation in a fiscal unity (financial, economic and organisational integration).
II. Tax Office T vs. S
Case C-269/20 concerned the fiscal unity between a German foundation under public law as the controlling company and a limited liability company (GmbH) as the controlled company.
Again, the ECJ ruled almost word for word that the relevant EU Directive does not preclude the German regulation on the sole tax liability of the controlling company of a VAT group (umsatzsteuerliche Organschaft) if this controlling company is able to enforce its will on the other members of this group and provided that this regulation does not lead to a risk of tax losses.
The ECJ also ruled that the national implementation of the regulations on the fiscal unity mandatorily provides for a sole taxable person and that only one VAT number is assigned to the fiscal unity.
Furthermore, the ECJ answered the question that EU law must be interpreted to the effect that, in the case of a VAT group which, on the one hand, carries out economic activities for which it is subject to tax and, on the other hand, assumes non-taxable sovereign tasks, the provision of a service in connection with this sovereign activity by a member of this group may not be taxed under EU law.
III. First classification
With the two current decisions, the ECJ has not completely overturned the German rules on fiscal unity, but has indicated a need for reform:
- The controlling company can continue to be the taxable person and the tax debtor of the controlled companies vis-à-vis the tax office. However, the ECJ did not follow the opinion of Advocate General Laila Medina to the extent that the group of companies forming the fiscal unity, as a so-called VAT group, constitutes “a fictitious entity created specifically for VAT purposes”, so that the fiscal unity is an independent taxable person and therefore also a debtor for VAT vis-à-vis the tax office. Conversely, certain controlling companies would be exempt from the tax liability of the fiscal unity. If the ECJ had followed this view, the controlling companies would have been able to reclaim the VAT assessed against them (with the consequence of possible tax reclaims of up to EUR 20 billion for each open year).
- The regulations on the allocation of VAT ID numbers and the submission of recapitulative statements must be adapted. Since only one VAT ID number is to be issued to the fiscal unity, only one VAT return can be submitted and not, as previously, a separate VAT return for each controlled company.
- The view previously held by the tax authorities that the controlling company must also hold a voting majority in the controlled company in addition to the majority shareholding in the controlled company is not compatible with EU law. Nor is it permissible to restrict the fiscal unity to cases of superordination and subordination; the statutory regulation must be adapted in this respect.
- It is still unclear how services within the fiscal unity are to be treated for VAT purposes in the future. From the ECJ’s point of view, controlled companies can continue to be regarded as independent. Should there be a change in the internal services between the members of the fiscal unity, which have so far been considered non-taxable in Germany, this would have a considerable impact on companies with limited input tax deduction.
In particular for the assessment of internal services, it will therefore be decisive how the German Federal Fiscal Court deals with this issue in its subsequent rulings.