Germany’s federal government puts application for VAT grouping on the agenda - package of measures to reduce bureaucracy

The German government plans to introduce 22 measures to reduce bureaucracy. Following the federal and state working group’s completion of the preliminary work, a process will be introduced according to which a VAT group does, if possible, not come into force without an application and a conformation from the tax authorities that the legal criteria are met.

VAT grouping is one of the most demanding areas of VAT law. Pursuant to Section 2 (2) No. 2 of the German VAT Code (UStG), a legal entity must be financially, economically, and organizationally integrated into the head of the VAT group. The proceedings at the ECJ (European Court of Justice) and the BFH (Germany’s Federal Court of Finance) on these requirements are innumerable - most recently, we reported here on the ECJ ruling of April 15, 2021, C-868/19, in the "M-GmbH" case on partnerships as integrated companies and the ECJ ruling of March 11, 2021, C-812/19, in the "Danske Bank" case on supplies between the headquarters and the permanent establishment in VAT group cases.

Implementation on a day-to-day basis and detailed preconditions in need of interpretation complicate the handling of this issue

The VAT group has always been an uncertain territory, especially for companies with a complex corporate structure. It must not only be ensured that the three prerequisites for integration are met, but the VAT group rules must also be implemented  on a day-to-day basis as soon and as long as all the prerequisites have been met.. Even just a change in management or voting rights can constitute or destroy the organizational integration . Any change in the settlement of supplies between affiliated companies can have an impact on the economic integration. Many companies have long considered it onerous to monitor this permanently. Any error here is particularly dangerous because if a VAT group remains undetected, the parent company is normally paying too little VAT, and in the case of an input tax surplus, the integrated company may have a VAT shortfall. The fact that this is a zero-sum situation from an economic standpoint is a view not shared by the tax authorities, who may assess interest and fines or, in the worst case, even launch a criminal investigation.

Application for VAT grouping: relief only if VAT group status is not desired

Given this situation, the current efforts to introduce an application procedure  for VAT grouping provide hope (but the phrase "if possible, only upon application" should be omitted). Article 11 of the EU VAT Directive grants Member States the right to choose whether to "treat the parties together as one taxable person" if the three integration requirements are met. In our opinion, this should enable the German legislator to not automatically assume that a VAT group exists just because the conditions are met - unless the entrepreneur has explicitly applied for this. However, it does not allow to apply the special rules of a VAT group if the prerequisites for integration are not met. A thorough examination of the complex integration requirements is, unfortunately, still a necessary requirement for having a VAT group. This permanent monitoring can only be avoided if the parties involved do not want a VAT group.

Practical details still unresolved

At present, we can only speculate on the exact process for applying for a VAT group: Can the potential head of the VAT group simply submit an application to the tax office? Will this tax office reach its decision alone or in consultation with the tax offices responsible for the companies to be integrated? Do companies that already follow the tax group rules now have to submit an application for their further use? Can they "opt out" of the fiscal unity by submitting an application?

We will monitor the legislative process and keep you informed.

Dated: May 10, 2021