The financial links requirement

The Court of Appeal in Arnhem-Leeuwarden ruled again on financial links within a VAT group. The judgment confirms how strict the requirement of an interest above 50% is.

On 11 June the Court of Appeal in Arnhem-Leeuwarden ruled in a dispute over whether the financial links requirement for a VAT group was met. It is not the first and probably not the last ruling on the point. In practice we regularly see confusion about how the linkage requirements are to be applied, partly because they were developed in case law rather than set down in legislation.

The linkage requirements

To form a VAT group, taxable persons must be linked financially, organisationally and economically. A VAT group counts as a single taxable person, supplies within the group are outside the scope of VAT, and only one consolidated return need be filed.

For organisational links there must be joint management, or at least management functioning as a unit, or the management of one participant must in fact be subordinate to that of another. There are economic links, in short, where the participants' activities are largely directed at the same economic objective, or where one participant's activities are largely carried out for the benefit of another.

For financial links, at least a majority of the shares and the control in each participant must be, directly or indirectly, in the same hands. Case law has repeatedly held that a 50% interest is not enough. A shareholding with control of at least 51% is therefore a very strict requirement. Entities without share capital can also form part of a VAT group, provided certain conditions on mutual financial dependence and control are met.

The ruling

The case concerns a group structure active in developing and operating immovable property, providing property-related services, contracting work and supplying staff for projects.

Following an audit, the tax authorities raised assessments on X BV. In their view too much VAT had been deducted, because X BV also carries out non-economic activities, namely making staff available to group companies free of charge. A pro rata calculation should have been made because there were both economic and non-economic activities.

X BV argues that a VAT group existed between the three companies, so that no VAT was due on the work carried out between them.

That there are economic and organisational links is not in dispute. The court had to rule on the financial links, and drew on the existing case law.

X BV relied on a Supreme Court judgment of 19 December 1979, which in its view shows that there are financial links where a group works together as a unit. It also pointed to voting arrangements between two of the companies.

The court held that X BV cannot rely on that judgment, because it was given in a different context at the time and does not support that conclusion. Nor did the court consider it plausible that the voting arrangements already existed in the periods covered by the assessments. The court also expressly repeated the strict requirement of an interest above 50%, referring to the Supreme Court's judgment of 18 February 2022.

Forming a VAT group raises a good many questions in practice. We are happy to think along about the requirements and about the pros and cons in your situation.