Germany: Latest ECJ case law on VAT groups

On 1 December 2022, the European Court of Justice (ECJ) published rulings regarding the German rules for VAT groups. These rulings mainly concerned whether the current German VAT grouping rules align with the EU VAT directive. Accordingly, the ECJ made the following judgments regarding the German VAT group rules, rights, and obligations. 

What is the VAT grouping scheme?

Under EU VAT law,  the tax authority of an EU member state can allow a VAT grouping scheme. This scheme enables closely-linked entities (including non-taxable entities) that are legally independent to be considered as a single VAT-taxable person. Under the VAT grouping scheme, entities must have financial, organisational, and economic links to be eligible. After that, the VAT group will have its own VAT number and file VAT returns on a consolidated basis. Any third party will interact with the VAT group instead of the individual entities. 

However, the German VAT group rules are believed to contradict the EU VAT directive. The core issues discussed included the following; 

A controlling company as taxpayer

As per German VAT group rules, the VAT group (the Organschaft) is not considered a VAT-taxable person. Instead, the parent entity (the Organträger) is regarded as the taxpayer. The other members of the VAT group are 'absorbed' into the controlling company for VAT purposes. 

The ECJ ruled that although the current EU law specifies that VAT groups are no longer separate entities but one single taxpayer, there are no further specifications on determining the representative of the VAT group. Furthermore, the EU law also lacks specifications as to which way a 'representative' must comply with the tax obligations of a group. Therefore, the ECJ confirmed that this German concept of VAT grouping complies with the VAT directive.

German financial integration rules

Regarding what classifies as 'financial integration' within VAT groups, the ECJ ruled that the German interpretation does not comply with EU law. The VAT directive does not require a subordinate relationship between the controlling company and the other VAT group members. Therefore, in contradiction to the current German law, if the controlling entity holds the majority of shares/interests, the controlling company is not required to subsequently control the majority of voting rights. 

Supplies between VAT group and controlling company

Another significant question brought forward to be ruled by the ECJ is whether a non-controlling member of a VAT group is typically regarded as not independent for VAT purposes. The German understanding considers VAT group members as not separate but part of the controlling company. As a result, supplies made between members of the VAT group are regarded as intra-group supplies and considered VAT-exempt. In response to this, the ECJ ruled that a Member State may not automatically assume a member of a VAT group as not being independent. Instead, as per the EU VAT law, Member States must review whether the relevant member of the VAT group pursues individual economic activity. 

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