On 11 March 2021, the CJEU gave a significant judgment in a case concerning the determination of the status of a parent entity (the mother company) and its branch on the basis of VAT regulations. The purpose of the judgment was to specify which tax obligations apply to which entities. This concerns entities based in different EU Member States. The judgment may greatly facilitate the interpretation of legal regulations, as well as their proper application.
The question to the CJEU
The judgment was given in response to a question for a preliminary ruling. The question was related to the interpretation of the provisions of the VAT Directive in a situation where the principal establishment of a company is situated in one Member State and a branch of this company is established in another Member State. The CJEU was asked to specify whether these entities should be regarded as separate taxable persons when the principal establishment provides the branch with services and imputes the costs of these services to the branch.
Importantly, in the case in question, the principal establishment operated within a separate VAT group recognized as a single taxable person. In turn, the branch was not a member of that group.
The principal establishment located in Denmark was a member of a VAT group established under Article 11 of the VAT Directive. The VAT group was a group of related entities based in Denmark, which, for the purpose of the VAT, were treated as a single taxable person. The Swedish branch was not a member of the VAT group and functioned as a separate entity.
What did the CJEU conclude?
The CJEU decided that the entities should be considered separate taxable persons if the principal establishment provides services to the branch and imputes the costs of these services to the branch.
This may take place when the additional conditions discussed by the Court in the grounds for the judgment are met, and especially when the branch may be treated as an entity that is independent of the parent company and that performs separate economic activity.
In the judgment, the Court clearly emphasized that the provision of services between a branch and the parent entity is subject to taxation only if there is a legal relationship between the service provider and the service recipient in which there is reciprocal performance.
When does a branch of a company become an independent taxable person?
In this respect, the CJEU concluded that in order to determine the status of a branch as a separate taxable person, it is necessary to ascertain whether the branch is independent, especially in terms of bearing the economic risk arising from its business. Assigning an entity to a group affects its independence in view of tax regulations.
Operating within a VAT group as a significant factor
The Court pointed out that the functioning of entities within a VAT group is an important aspect in classifying the activities carried out between a branch and the principal establishment. The participation of one of the entities in a VAT group while the other one is not a member of that group means that these entities are independent of each other.
The full text of the judgment is available HERE.