What is a VAT Group?
A VAT Group is a group of entities established in the territory of the same Member State, which, while remaining legally independent, are closely connected financially, economically, and organizationally, and have expressed their intention to act as a VAT Group and notified the competent authorities in the country of establishment, having met the conditions for forming a VAT Group as defined by that state. A branch of a foreign enterprise is also considered an entity established in one of the EU Member States.
The possibility for Member States to introduce such a solution is provided for in Article 11 of Council Directive 2006/112/EC on the common system of value-added tax. Poland has exercised this option and, as of 1 January 2023, incorporated VAT Group provisions into its national legal system.
Rules for Taxation of Transactions Carried Out by the VAT Group and its Members
A VAT Group is an active VAT taxpayer. Consequently, its individual members lose their individual status as VAT taxpayers. It is the group that is obliged to settle VAT on transactions carried out within the scope of its business activities. The general rules of taxation are the same as for any other VAT taxpayer and therefore, depending on the type of transaction, these may:
- be subject to VAT at the applicable rates depending on the type of goods or services;
- be taxed at a 0% rate, for example in the case of intra-Community supplies of goods, exports of goods, or the supply of certain goods and services listed in Article 83 of the Polish VAT Act or its implementing provisions;
- be exempt from taxation due to the nature of the transaction;
- or not be subject to taxation in Poland due to the nature or place of supply being outside the territory of the country.
VAT Group – Differences
Differences arise in internal relations within the group and in the case of certain cross-border transactions.
The most significant difference appears when transactions are carried out between members of the VAT Group. In such cases, supplies of goods and the provision of services between members of the same VAT Group are not subject to VAT.
Individual members providing services or supplying goods to entities outside the group carry out taxable activities (assuming these are taxable in general). However, the VAT taxpayer in respect of such transactions is the VAT Group, not the individual member.
Similarly, in the case of purchases made by individual members, the principle is that the purchase transaction is attributed to the entire VAT Group, not to the individual members.
A significant change occurs when transactions are carried out between a company and its foreign branch.
Positions of the Court of Justice
As a rule, a foreign branch of a company does not have legal personality and is not a separate VAT taxpayer. The branch uses the VAT number assigned to the company for VAT transactions, not a separate number. Therefore, standard transactions between a company and its foreign branch are not subject to VAT and are treated as internal settlements. This has been confirmed by the Court of Justice of the European Union (CJEU) in its judgment in case C-210/04, FCE Bank, where it held that a fixed establishment does not constitute a separate VAT entity and, consequently, no supply of services can take place between the head office and its fixed establishment.
However, this principle is significantly restricted in the context of VAT Groups, as it applies only as long as neither the company nor its foreign branch is a member of a VAT Group. According to both Directive 2006/112/EC and Polish law, members of a VAT Group lose their status as VAT taxpayers in favour of the group as a whole. Therefore, transactions between a company and its foreign branch, where one of them belongs to a VAT Group or both belong to different VAT Groups, must be treated as transactions between two different VAT taxpayers.
This position was confirmed by the CJEU in its judgment of 17 September 2014, case C-7/13, Skandia America Corp. (USA), filial Sverige v. Skatteverket (hereinafter: the Skandia judgment), where it held that:
“Articles 2(1), 9 and 11 of Council Directive 2006/112/EC must be interpreted as meaning that services supplied by a company’s main establishment located in a third country to that company’s branch established in a Member State constitute taxable transactions if the branch is part of a group of persons regarded as a single taxable person for VAT purposes.”
The CJEU adopted a similar approach in a case involving two foreign branches of a company, one or both of which belonged to different VAT Groups. In its judgment of 11 March 2021, case C-812/19, Danske Bank A/S, Danmark, Sverige Filial v. Skatteverket, the Court held that:
“Articles 9(1) and 11 of Directive 2006/112/EC must be interpreted as meaning that, for the purposes of VAT, the main establishment of a company in one Member State that is a member of a VAT group established pursuant to Article 11, and a branch of that company located in another Member State, must be regarded as separate taxable persons when the main establishment provides services to that branch, the costs of which are allocated to that branch.”
This position has also been confirmed by the Polish Supreme Administrative Court (NSA). In its judgment of 18 March 2021, case ref. I FSK 2386/18, the NSA held that the essence of the CJEU’s Skandia judgment is the recognition that services provided by a third party to a member of a VAT Group must, for VAT purposes, be deemed to have been rendered not to that member, but to the VAT Group to which it belongs.
As a result, Polish legislation has addressed such situations in the VAT Act, specifying in Article 8c of the Act that:
- The supply of goods and provision of services by a branch being a member of a VAT Group to:
- a taxpayer not established in the territory of the country that created the branch,
- another branch of the taxpayer referred to in point 1, located outside the territory of the country – shall be deemed to have been made by the VAT Group to an entity not belonging to it.
- The supply of goods and provision of services to a branch that is a member of a VAT Group by:
- a taxpayer not established in the territory of the country that created the branch,
- another branch of the taxpayer referred to in point 1, located outside the territory of the country – shall be deemed to have been made to the VAT Group by an entity from outside the group.
- The supply of goods and provision of services to a branch that is a member of a VAT Group established in a Member State other than the Republic of Poland by a taxpayer established in the country that created the branch – shall be deemed to have been made to that VAT Group.
- The supply of goods and provision of services by a branch that is a member of a VAT Group established in a Member State other than the Republic of Poland to a taxpayer established in the country that created the branch – shall be deemed to have been made by that VAT Group.
Due to the above exceptions, the rules of VAT taxation of transactions both within and outside the VAT Group should be subject to thorough analysis, particularly regarding the type of entities forming the group and the entities with which the VAT Group performs taxable activities.
Attention!
In view of the aforementioned deviations, special attention should be paid to procedures operating within organizations that are members of a VAT Group. According to Article 15a(15) of the VAT Act:
A VAT Group loses its status as a taxpayer:
- on the day preceding the occurrence of factual or legal changes resulting in the violation of conditions necessary for the recognition of the group as a VAT taxpayer;
- upon expiry of the period for which it was established.
This means that if a VAT Group does not implement regular verification procedures to ensure the conditions for maintaining VAT Group status are met, it may turn out that VAT settlements within the group are incorrect and may be challenged by tax authorities. To minimize such risk, it is advisable to introduce appropriate procedures or review existing ones, and above all, ensure their consistent application within the organization.
Should you have any questions or need assistance on this matter, please do not hesitate to contact us.
