Decision of the Court
On April 15, 2021, the European Court of Justice issued its ruling in the case C-868/19 “M-GmbH” on the scope of the VAT group provisions.
In the case at hand, the German Tax Authorities denied to PD GmbH & Co KG (now its legal successor M-GmbH) and its majority-held limited liability partnership to form a VAT group in Germany. According to German VAT law interpretation, the financial link criteria set by article 11 of the EU VAT Directive EC 2006/112 can never be fulfilled with regards to partnerships, unless the other partners of the partnership are financially integrated in the controlling company. Due to the fact that the limited partners in the present case include both legal persons and individuals, the financial criterion cannot be met according to the German Tax authorities. M-GmbH disagreed with this view and the European Court was subsequently asked to decide whether the German rules limiting the access to a VAT group only to legal persons – and not partnerships – were in line with the EU VAT legislation.
Not surprisingly and in line with previous caselaw, the European Court overturned the German interpretation on the ground that while Members States have the freedom to choose whether to implement VAT grouping provisions into their national law or not, they are not allowed having a restrictive interpretation of the conditions for forming a VAT group and neither could they add further conditions to join a group, except for the purpose of preventing abusive practices or tax avoidance which then also needs to be proportionate.
Impact in Belgium
Belgian VAT law also allows “all persons established in Belgium” that are closely linked together on a financial, organizational and economical basis, to form a VAT group. However, Belgian administrative practice limits this application to Belgians subject to VAT (taxable or exempt) persons. Moreover, in our daily business we see that the Belgian VAT authorities are just as reluctant to allow natural persons, even when these carry out VAT taxable/exempt activities, to become a member of a VAT group. This all under the simple argument: such a measure is needed for the purpose of preventing abusive practices or tax avoidance. But again, the European Court explicitly states that a systematic use of this argument to not allow non-taxable persons to form a VAT group, without any further guidance, is not allowed. Hopefully this time Belgium will conform to this caselaw and comply with EU VAT rules in this respect.
Impact in Luxembourg
At first sight, this case may seem of little impact in Luxembourg. There is no such restrictive interpretation of the scope of the VAT group in Luxembourg as the article 60ter of the Luxembourg VAT Law targets “persons” without any additional specification.
However, it is also interesting to note that the European Court has confirmed that the request for a written proof of the fulfilment of the conditions to form a VAT group or the prior approval of the VAT authorities were proportional means to ensure the rightful application of such regime.
In practice, difficulties may however arise as the law currently requires that the existence of a financial, economic and organizational link between the members of a group must be established by a certified auditor or accountant.
Tiberghien international tax team will continue to monitor these developments. In case you have any further questions or want to discuss this, please do not hesitate to contact the authors.
Gert Vranckx - Senior Associate (gert.vranckx@tiberghien.com)
Ngoc-My Nguyen - Senior Associate (ngoc-my.nguyen@tiberghien.com)