Article by Luís Aires
Indirect Tax Advisor
Author/Researcher on VAT Policy/Case Law and Indirect Tax Technology
1. The VAT regime applicable to autonomous groups of persons in the VAT Directive
Since the creation of the VAT system, the need to exempt certain transactions from this tax has been recognized, either in the public interest associated with certain areas such as health or education (with the intention of relieving the consumer of the additional burden created by the tax), or because of the high complexity in determining the added value of certain services, as is the case, for example, in the financial area.
In so far as such exemptions detract from the simplicity and neutrality of the VAT system, because they anticipate the final stage of the tax chain for a productive phase of the consumption process, leading to hidden tax on economic operations, the Sixth Directive introduced Some mechanisms are intended to remedy the harmful effect they have on traditionally exempt sectors, such as the exemption provided for the provision of services by autonomous groups of people to their members. This exemption originally determined by Article 13 (1) al. (f) of the Sixth Directive (now in Article 132 (1) (f) of the VAT Directive) was intended to enable traders with deduction entitlements not to see the cost of their services. aggravated by VAT, where they have chosen to collaborate with professionals who market the same services through a common structure that provides certain services necessary to conduct their business. That is to say, the VAT Directive intended to equate these transactions with internal transactions by eliminating the burden of VAT on those traders which they cannot, after all, deduct
1.1. Autonomous groups of people performing an exempt activity
It should first be noted that there is no ECJ case law that focuses in particular on the concept of ‘autonomous groups of people’, which necessarily makes it difficult for the interpreter to deleterize its scope and scope.
First of all, when referring to ‘autonomous groups of persons’ rather than ‘taxable persons’, the precept seems to apply quite widely, and even the European Commission has recently considered that it does not follow from its reading that this independent entity should have necessarily legal personality (VAT Committee Working Paper No 883 of 30/09/2015, para 3.2.1, para. 4).
On the other hand, when referring to ‘persons exercising an exempt activity’, without specifying in any way the content of that exemption, the question arises as to whether, for the exemption to apply, it is necessary that: (a) exempted members of the grouping are exclusively engaged in an exempt activity; and / or if; (b) the group is made up solely of persons engaged in an exempt activity.
As regards the first question, Article 132 (1) al. (f) of the VAT Directive, by stating that the exemption applies to autonomous groups of persons “exercising an exempt activity or in respect of which they are not taxable persons” seems to foresee the possibility of applying the exemption to taxable persons exercising an exempt activity, together with a taxed activity. In fact, it is not expressly apparent from the wording of the rule that it is applicable only to taxable persons who engage exclusively in exempt activities.
This is also the conclusion of the Commission (Idem, paragraph 3.3.1., Para. 12), which accepts that the exemption should apply as a result of the services provided by the grouping being used in the exempt activities of its members, regardless of whether the taxable person benefiting from this exemption carries out, simultaneously with the exempt activity, a taxed activity.
To this end, the Commission proposes two alternative ways of applying the exemption.
In a first scenario, the exemption would be partially applicable to the taxable person benefiting from it, depending on the prorata found by it. However, this solution gives rise to practical and, above all, compatibility with the VAT system and may be called into question by the different tax treatment given to the same service provision, in a context in which European case law is unanimous in considering whereas the ‘single economic operation transaction must not be artificially broken down so as not to alter the functionality of the VAT system’ (ECJ 27 Oct. 2005, Case C-41/04 para. 22, Levob Verzekeringen and OV Bank).
What is curious about the words used by the Commission is that it states that in such cases taxable persons must reach an exempt activity threshold in order to be eligible for the exemption, and if they do not reach that exemption. threshold, the exemption will not apply regardless of whether the service is used primarily for the exempt activity of that taxable person.
In other words, it follows from the Commission’s words that the fact that a particular taxable person cannot enjoy the exemption because it does not reach such a threshold does not preclude the application of the exemption to the other members of the group. To put it another way: the group is nonetheless regarded as an ‘autonomous group of persons exercising an exempt activity’ for the purposes of applying the exemption to the other members.
From these considerations follows the negative answer to the second point raised above, namely: in the absence of express prohibition, it does not appear that groups should be constituted exclusively by members with exempt activity, so that the exemption will continue to apply to the other members of the group. group meeting the conditions laid down in Article
In this sense, exempt members and taxed members may coexist in a given grouping, and the exemption applies to those who comply with the requirements of the VAT Directive.
1.2. Services directly necessary for the exercise of the activity of taxable persons
The second criterion underlying the application of the exemption will be that the services are “directly necessary” to the acquirers’ business.
In view of the principle of neutrality and that exemptions are subject to strict interpretation, does the Commission consider that the concept of ‘services directly necessary for the pursuit of the activity’ should be interpreted as meaning that they are ‘specifically related to taxable persons’ activity (VAT Committee Working Paper No. 856 of 06/05/2015, paragraph 3.3.1., para. 10).
According to that interpretation, certain services of a more general nature, such as cleanliness, security and legal assistance, should be taxed as they are not in themselves necessary for carrying on an exempt activity.
Since there is no case law on this concept, in order to clarify what we should understand by services “specifically related” to the activity, we believe that we can draw on the case law which deals with a similar concept in another provision of the VAT Directive (the “closely related” services) provided for in the VAT exemption applicable to hospitalization and medical Thus, the ECJ tells us that an operation is considered to be ‘closely related’ when it constitutes an indispensable operation for carrying out the main operation, or, more precisely, when it constitutes an ‘indispensable step in the process of providing those services to achieve the objectives (… ) pursued by them ”(ECJ 1 Dec. 2005, Case C-394/04 and C-395/04, para. 25, Ygeia).
2. ECJ judjement case C-400/18 (Infohos)
Reagarding the VAT exemption on Independent groups of persons, on 20 November 2019, the ECJ ruled in the case of Infohos (C-400/18) that the former version of the Belgian VAT exemption for ‘independent groups of persons’ (hereinafter IGP) goes against EU law when it denied the application of the exemption to a group that provided services also to non-members. The CJEU’s decision broadens the previous scope of application of this VAT exemption in Belgium and it remains to be seen what the impact will be on the since mid-2016 adjusted scope of the exemption.
Infohos is an association that specializes in hospital information technology. It provides IT services to hospitals affiliated with it as well as to non-members.
It entered into a cooperation agreement with IHC-Group NV to jointly, but at the order of Infohos, develop new or innovative software applications for the hospitals affiliated with it.
Infohos did not register as a taxable person because it considered that it could not be regarded a taxable person or, at the very least, it would qualify for the VAT exemption.
The Belgian tax authorities took the view that the mutual services between Infohos and IHC-Group should be subject to VAT. Moreover, according to the tax authorities, the carrying out of taxable transactions for non-members meant that transactions for members of Infohos also had to be subject to VAT, and that Infohos was therefore no longer eligible for the VAT exemption, for the services provided to its members.
The Hof van Cassatie (High Court in Belgium) decided to refer the following question to the Court for a preliminary ruling:
“Must Article 13A (1) (f) [of the Sixth Directive], now Article 132 (1), (f), [of the VAT Directive] be interpreted as allowing the Member States to benefit from the exemption provided for therein to attach an exclusivity condition whereby an independent group that also provides services to non-members is also fully subject to VAT for services provided to members?”
2.1.1. An IGP could only provide services to its members until mid-2016
The VAT exemption for independent groups of persons (also referred to as the exemption for cost sharing associations) is available to groups of VAT exempt enterprises and non-taxable persons that carry on activities in the public interest. Under the former Belgian legislation, one of the requirements for the application of the exemption was that the group provided services exclusively to its members. As a result, when a group also provided services to non-members, it was subject to VAT with regard to all its services, including those provided to members, and was fully excluded from the application of the VAT exemption.
Infohos was an association that specialized in information technology for hospitals and provided services to members as well as to non-members. Also, it signed a cooperation agreement with the IHC-Group to develop new software applications for its member hospitals. Infohos was not registered for VAT in Belgium because it considered itself as a non VAT taxable person or, at least, as an exempt independent group of persons. The Belgian VAT authorities, however, considered IHC-Group as a third party and claimed that the mutual provision of services between Infohos and IHC-Group are subject to VAT. As a result of the provision of these services to IHC-Group (non-member), Infohos was not entitled to apply the above exemption to any of its services. Under these circumstances and in light of the former Belgian legislation, the case was referred to the ECJ.
2.1.2. Restricting the scope of an exemption requires sound reasons, not generic excuses
The ECJ recalled that Member States are entitled to establish requirements for a correct and simple implementation of the exemption for independent groups of persons within the context and the aim of the VAT Directive. Accordingly, the CJEU considered the following arguments:
- Context and aim of the VAT exemption for independent groups of persons: neither the context nor the aim of the VAT exemption in the VAT Directive suggest that the scope of application of the exemption is restricted to independent groups of persons that exclusively provide services to members. A denial of the VAT exemption only on the ground that a group provides services also to non-members, cannot be justified by the aim of the VAT Directive.
- Distortion of competition: the Belgian legislation implies a general assumption of distortion of competition. However, the argument of distortion of competition cannot justify a limitation in general terms to the scope of the VAT exemption. By denying the VAT exemption in all cases when an independent group of persons provides services also to non-members, the scope of the VAT exemption was limited in general terms.
- Prevention of fraud, evasion and avoidance: the requirements for the application of the VAT exemption in order to prevent fraud, evasion and avoidance, may not pertain to the description of the content of the VAT exemption. This is, however, the effect of the Belgian legislation with respect to independent groups of persons providing services to non-members, as the legislation implies a general irrefutable presumption of fraud, abuse and evasion, without specifying what type of fraud, evasion or abuse is aimed to be prevented.
2.2. A reasoning that can be used in a broader context
Based on the above arguments, the ECJ concluded that the former Belgian implementation of the VAT exemption for independent groups of persons was against EU law when the application of the exemption was conditional on the fact that independent groups of persons only provide services to their members.
The ECJ’s decision should broaden the scope of the exemption in the Belgian context. Its reasoning may also have an impact in the following cases:
- Pending discussions and litigations with the Belgian tax authorities on the application of VAT the exemption of independent groups of persons;
- Applicable legislation of other Member States that implement this VAT exemption;
- Belgian regulations that contain provisions related to the distortion of competition and prevention of fraud, evasion and abuse, including o. the current rules on the application of the VAT exemption for independent groups of persons.