The Court of Justice of the European Union (CJEU) on 11 March 2021 issued its decision in the Danske Bank A/S VAT case (Case C-812/19).
The case concerned the application of VAT on services rendered by a head office in one EU Member State to its branch in another EU Member State. The CJEU had to deal in the past with the issue of the VAT treatment of dealings between principal establishment (head office) and branches. Initially, it determined in its FCE Bank ruling that the principal establishment and the branch are not separate taxable persons for VAT purposes unless there exists a legal rapport between the branch and head office pursuant to which dealings between them can be made. This would be the case if the branch carries out economic activities independently from the head office and bears the risks of its activities. In the FCE Bank case, the Court found that -in part because of the operation of the banking industry- the branch is not independent from the head office and does not itself bear the risks of its activities. Therefore, the dealings are not made between two independent parties and should be ignored for VAT purposes.
The CJEU further developed its reasoning on this issue in the Skandia America Corp. case, which dealt with the VAT treatment of services recharged by a non-EU (in this case, U.S.) head office to its Swedish branch, where the branch is part of a Swedish VAT grouping but the head office (obviously) not. In the Skandia case, the CJEU determined that the dealings should be treated as if they were carried out between independent parties and the Swedish branch should account for Swedish VAT on a reverse charge basis. The reasoning of the Court in Skandia appears to be that the dealings equate to dealings between the U.S. head office and a Swedish VAT grouping (of which the branch is a member, but the U.S. head office is not).
The Danske Bank case is the mirror image of the Skandia case, and the ruling of the CJEU was, therefore, much anticipated.
Danske Bank, a Danish legal entity, owns an IT platform that is commonly used for most of its activities in Scandinavian countries. It charged costs for the use of the platform to its Swedish branch. Danske Bank does have a VAT grouping in Denmark, but the Swedish branch is not a member of the grouping given that Danish law, in accordance with Art. 11 of the EU VAT Directive, limits membership in VAT groupings to the Danish establishments only.
The issue arose following a ruling request by the Swedish branch on the VAT treatment of the head office charges. The branch took the position that the VAT in the dealings between the head office and the branch should be neutralized, while the tax authorities took the position that the Swedish branch, not being part of the Danish VAT grouping, must be treated as a distinct taxpayer from its Danish principal establishment (and its Danish VAT grouping), and must declare the VAT due in Sweden under the reverse charge mechanism. The disagreement between the Swedish branch and the Swedish tax authorities was eventually brought before the Swedish Supreme Court which put forward prejudicial questions to the CJEU.
In its decision, the CJEU essentially transposed its Skandia America Corp. reasoning to the Danske Bank case and ruled that the dealings between Danske Bank and its Swedish branch should be qualified as dealings between two distinct taxpayers: the Danish VAT grouping around Danske Bank on the one hand, and the Swedish branch on the other hand. It follows from this qualification that Swedish VAT is due on the recharge and should be accounted for by the Swedish branch under the reverse charge mechanism. The Court took the occasion to reaffirm its position in the FCE Bank case: in order to determine whether dealings between a principal establishment and a branch should be treated as dealings between two separate persons, one has to examine whether the branch carries out its activities independently from the principal establishment and bears the risks of its activities. The re-affirmation did not, however, bear on the Danske case obviously by reason of the fact that Danske Bank is part of a VAT grouping of which the branch is not a member.
Note that the CJEU issued the Danske Bank decision without an opinion from the Advocate General. The procedural rules of the Court allow it to adjudicate cases without an opinion from the Advocate General if it is of the view that the case does not raise any new questions of law.