Does the Court of Justice compel a broader reading of financial links?
The Norddeutsche Gesellschaft für Diakonie judgment casts doubt on the strict Dutch reading of financial links. Good news for those who want a VAT group, less so for those trying to avoid one.
The starting point is that every business is brought within VAT independently, even within a group or collaborating set of companies. There is one exception: the VAT group. Businesses linked financially, organisationally and economically are treated together as a single taxable person.
In 2015 the Court of Justice held that giving concrete shape to those links was a matter for national law. It therefore did not treat the linkage requirements as EU law concepts whose interpretation is reserved to the Court itself.
The Dutch Supreme Court
The Supreme Court first gave detailed content to those requirements in the 1980s. For companies with share capital, the position since then is that at least a majority of the shares in the subsidiary and the associated control must be, directly or indirectly, in the same hands.
Where the associated persons have no share capital, such as a foundation or association, there are financial links where one person has a degree of control over the other that is no less than a shareholder's, and the financial relationship is such that by using that control the financial positions of those persons can be brought into a desired relationship with one another.
The Court of Justice
The recent Norddeutsche Gesellschaft für Diakonie judgment raises the question whether that reading is too strict. In it the Court appears to change course, holding that financial links is after all a concept to be interpreted at European level, so that it means the same in every member state.
The Court held that financial links do not require a majority of the voting rights in addition to a majority of the shares. That casts doubt not only on the strict German reading but on the Dutch one too.
What this means for you
Although the Supreme Court reaffirmed its strict reading earlier this year, it is a matter of time before the question reaches it again. In our view it will then have little choice but to lower the bar.
That is good news for businesses that would like to form a VAT group, particularly collaborating foundations and associations in the non-profit sector, for instance to avoid VAT on costs recharged between them, but which have so far fallen foul of the strict condition.
For businesses that specifically do not want a VAT group with an associated business, for example because of restrictions on deducting general costs, and that have therefore structured matters so that nobody holds a majority of the shares and the associated control, the judgment is less welcome. For now they can rely on the Supreme Court's strict reading, but the question is for how long.