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VAT: Revenue release e-Brief regarding Head Office

Friday, October 31, 2014

VAT decision likely to cost International Groups

A recent decision of the European Court of Justice (“ECJ”) could have significant consequences for international groups who provide services to each other cross-border.  The decision will have particular consequences for all VAT exempt or partly exempt businesses; such as those operating in the financial services sector. The decision was in the case of Skandia America Corp. (USA), filial Sverige v. Skatteverket (the Swedish tax authorities) Case C-7/13.

The Decision

The ECJ has held that, for VAT purposes, where a company provides services to a foreign branch:

a) for consideration; and

b) where that branch belongs to a VAT group;

then the services should be regarded as having been provided to the VAT group and not the branch. The consequence of this is that previously ignored transactions may now be treated as a supply of services upon which VAT is now due.

The case arose from the Swedish tax authorities’ decision to charge VAT on the supply of software and software related services by Skandia America Corp., established in the USA, to its branch Skandia Sverige in Sweden – the branch having been registered as a member of a VAT group in Sweden since July 2007. In hearing the case, the Swedish Court decided to stay the proceedings and to refer two questions to the ECJ for preliminary ruling. The questions were as follows:-

(1) Do supplies from externally purchased services from a company’s main establishment in a third country (here, the United States) to that company’s branch in an EU Member State, together with an allocation of costs for the purchase by the branch, constitute taxable transactions if the branch belongs to a VAT group in the Member State? and

(2) If the answer to the first question is in the affirmative, is the main establishment in the third country to be viewed for VAT purposes as a taxable person which is not established in the EU Member State of the branch, with the result that the branch purchaser of the services is to be taxed for the transactions?

The ECJ answered both questions in the affirmative. In relation to question 2 specifically, the Court further held that:

a) where a company headquarters in a third country supplies services to a branch;

b) for consideration; and

c) where that branch belongs to a VAT group in a Member State,

then the VAT group will become liable for the VAT payable.

The ECJ’s ruling is a significant break on the previously generally accepted view that the supply of such services to a branch which is a member of a VAT Group does not give rise to a VAT liability.  The decision has the potential to give rise to significant VAT liabilities to EU based companies operating in VAT exempt activities who receive inter-group supplies of services from other group companies.  These services would typically be IT support, HR, payroll functions, sub-licencing of software etc.


It remains to be seen how individual tax authorities will implement the new rules. Irish Revenue currently treats charges from foreign headquarters to Irish branches in a VAT group as outside the scope of VAT. The ECJ decision is however binding across all EU Member States. In light of this the Irish Authorities will therefore need to consider how the decision applies here and it is likely there will be some further information on this soon.

Exempt businesses with international branch networks and VAT group structures should however already commence initial assessments of their corporate structures. In particular they should consider their more tax efficient options in light of any anticipated legal changes to the VAT regime.

For more information contact Gavin McGuire