Advocate General criticises German VAT group - Opinion "Norddeutsche Gesellschaft für Diakonie mbH" and "S" (C-141/20, C-269/20)

On 13 and 27 January 2022, the Advocate General at the European Court of Justice (ECJ) issued an opinion on two references for a preliminary ruling from the German Federal Fiscal Court (Bundesfinanzhof, BFH). Unsurprisingly, she concluded that German law is contrary to EU law to the extent that it designates the head of a VAT group as the taxable person instead of the VAT group itself. However, the Advocate General's view that transactions within the VAT group are taxable contradicts previous ECJ case law.

Two ECJ submissions on the tax group

Both the V. and the XI. Senate of the German Federal Fiscal Court had submitted a VAT group case to the ECJ for a preliminary ruling (known as ECJ case numbers C-141/20 and C-269/20). In essence, both cases concerned the question of whether sec. 2 (2) No. 2 of the German VAT Code, which governs the VAT fiscal unity under German law, was compatible with article 4 or, today, article 11 of the VAT Directive. Under German law, not the VAT group itself, but only the controlling company of the group is deemed to be the VAT taxable person; the controlled companies are deemed to be dependent parts of the controlling company's business.

The BFH’s worst fears

If Sec. 2 (2) No. 2 of the German VAT Code were to be deemed contrary to EU law, the BFH feared massive tax losses because controlling companies would no longer be considered taxable persons and therefore could not be taxed. In addition, there would be no legal basis for taxing the VAT group or the controlled companies.

Advocate General: German law changes the concept of the VAT group  

The Advocate General concluded that German law, measured against the wording of the corresponding provision of the VAT Directive, was too restrictive. It could not be inferred from this that (only) the controlling company was a taxable person in the case of a VAT group. Rather, the VAT group as such is a taxable person. One of the group’s members must serve as the group's representative vis-à-vis the tax office, submit VAT returns and pay the VAT. However, this does not necessarily have to be the controlling company - any member of the group can fulfil this role.  In general, it is not necessary for a VAT group that a controlling company controls the affiliated companies in a form of a superordination/subordination relationship. It is sufficient that the members of the VAT group are connected by financial, economic, and organisational relationships.

Members should remain taxable persons themselves

In addition, the Advocate General posits that the members of the VAT group remain taxable persons in addition to the group itself. While it is true that not only German law but also the VAT Directive requires an independent and autonomous activity in order to be considered a taxable person, however, this would only exclude wage and salary earners, not members of a VAT group. Supplies between members of the group would remain taxable.  The VAT return to be submitted by the representative would be a compilation of the individual returns of the members. The members would be liable for the VAT as "joint and several debtors".

Practical effects

The German VAT group is down for the count - that much can be said. However, an opinion of an Advocate General is not yet a judgement. The ECJ often adopts the opinion of an Advocate General, but this is not mandatory. The ECJ has already ruled in the cases of Skandia America (C-7/13), Amplifin (C-162/07), and Danske Bank (C-812/19) that the VAT group itself is a taxable person, so it is to be expected that the ECJ will confirm the opinion in this respect. On the other hand, these decisions also speak in favour of not additionally considering the members of the group as taxable persons.

Even if the ECJ should rule completely in favour of the Advocate General, a cascade of questions arises with regard to the concrete effects in Germany:

  • Will the BFH consider Section 2 (2) No. 2 of the German VAT Code to be inapplicable? An interpretation that conforms with EU law is likely to fail due to the wording, but theoretically, there is also the possibility of a modified application under EU law. In this case, facts that are contrary to EU law can be disregarded and those required by EU law can be read into it. One conceivable interpretation could be that the group is the taxpayer, but the tax returns of the parent company are deemed to have been submitted in the name of the group. However, this would not solve the problem of taxable intercompany transactions, which result in a tax disadvantage in the context of the group declaration if members of the group are not (fully) entitled to deduct input VAT.
  • If Section 2 (2) No. 2 of the German VAT Code is considered inapplicable, the question arises as to how VAT groups will be taxed until a new regulation is issued. The BFH had submitted the question to the ECJ, asking whether the VAT Directive regulation can then be directly applied. Unfortunately, the ECJ asked the Advocate General not to deal with this. However, the ECJ had already commented on this question in the Larentia+Minerva and Marenave cases (C-108/14, C-109/14) and did not consider the VAT Directive to be directly applicable in this respect. If there is no VAT group regulation in Germany that complies with EU law, it is also conceivable that all members will be taxed individually until a new regulation is issued.
  • With regard to the new regulation, the question of retroactivity then arises. The ECJ itself could, as an exception, limit the effects of the judgement on the past cases for reasons of legal certainty if there was objective and significant uncertainty as to the scope of the provisions of European Union law and the judgement has far-reaching economic effects. Both conditions must be cumulative; financial effects alone are not sufficient.

The question for German VAT groups is whether there is an advantage to be gained from this development and whether they should file an objection against VAT assessments already issued or even against their own preliminary VAT returns and apply for the proceedings to be suspended until the issue has been clarified by the BFH. The possible advantages and disadvantages should definitely be weighed carefully and individually for each case before this path is taken, whereby the many uncertainties make this undertaking more difficult.

One can hope that the ECJ, and subsequently the BFH, will not leave the German VAT groups in the dark for long. As soon as the BFH reached a decision, new impetus should also be given to the reform efforts of the task force comprised of federal and state government representatives, which has already drawn up a paper on the key issues for possible future taxation of the VAT group, but which was put on hold because of the ECJ submissions. This key issues paper also includes a statement that the rules for VAT groups do not apply unless this has explicitly been applied for – which has been longed for by almost all stakeholders.