The CJEU has issued a landmark judgment concerning VAT settlements between a branch and a principal establishment belonging to a VAT group, where both locations are situated in different countries within the EU. According to the Court, a branch of a foreign entrepreneur in one member state should be treated as a separate VAT taxpayer from the head office belonging to a VAT group in another member state. Such conclusions were contained in the judgment of 11 March 2021, case C-812/19 – Danske Bank A/S. The consequences of such a turn of events will be felt by many entrepreneurs.
Branch of a foreign company as a separate taxpayer
In the present case, Danske Bank A/S acted in the territory of Denmark as a principal establishment, providing IT services to the branch. The costs for this were charged by the principal establishment to the branch located in Sweden. The Swedish branch of Danske Bank A/S, in its dispute with the Swedish tax authorities, referred to the ECJ judgment of 23 March 2006, case C-210/04 – FCE Bank. Based on the above ECJ decision, the company argued that the fact that the branch does not conduct independent economic activity and that the branch does not belong to a VAT group in Sweden are premises justifying assumption of the same tax subjectivity of the branch as of the principal establishment.
However, the CJEU did not share this position, quoting the judgment of 17 September 2014 in case C-7/13 – Skandia America. In this judgment, the Court emphasised that services provided by a main establishment located outside the EU to a branch belonging to a VAT group in a Member State should be treated as taxable transactions (as transactions of two separate taxpayers). Therefore, there is no reason why settlements between the principal establishment belonging to a VAT group and a branch located in two separate member states should be treated differently than in the quoted judgment as intercompany transactions within the same taxpayer.
The impact of the CJEU judgement on VAT settlements in branches of foreign companies in Poland
The judgment is of crucial importance for many branches of foreign entrepreneurs in Poland. It may significantly complicate settlements so far considered to be intercompany, which were not subject to separate taxation.
It should be recalled that in accordance with the provisions of the polish Act on the principles of participation of foreign entrepreneurs and other foreign persons in economic turnover in the territory of the Republic of Poland, a branch is a separate and organisationally autonomous unit of a foreign entrepreneur. However, it may conduct business activities only within the scope of the foreign entrepreneur’s objects of activity. The acceptance of a separate tax subjectivity of a branch and a principal establishment in two different member states on the basis of the above CJEU judgment may cause legal chaos in terms of VAT settlements in branches of foreign entrepreneurs in Poland.
The CJEU judgment modifies settlements of transactions within the boundaries of location of the branch
It should be pointed out that the CJEU judgment does not modify the right of a branch of a foreign entrepreneur to settle input VAT related to taxable operations of the principal establishment in the territory of another member state. Such right results directly from the provisions of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax. The above CJEU ruling regulates the possibility of deducting input VAT by a branch in connection with the branch’s taxable activities in the member state of its location and not the principal establishment.
Entrepreneurs unprepared for changes may lose
The above ruling may have a significant impact on the tax costs of some entrepreneurs. On the one hand, it forces taxation of transactions between entities as a result of treating a branch and head office belonging to a VAT group as separate taxpayers, when they are located in different EU states. On the other hand, it creates opportunities related to the right to deduct VAT and in result to claim a VAT refund. However, in order to avoid losses and choose a more favourable tax policy in this respect, transactions with the head office must be properly recognised and intercompany procedures have to be prepared correctly.
CJEU judgment – profits and losses for companies
The revolutionary CJEU ruling is a source of anxiety for entrepreneurs, but also new legal conditions, which are worth analysing in order to select the optimal tax policy. Appropriate preparation of intercompany VAT procedures will enable avoidance of losses or more favourable settlement conditions. However, each situation will require a thorough analysis and a balance of potential profits and losses.
Should you have any further questions, please do not hesitate to contact us.
Maciej Kozub, VAT Specialist