On April 15, 2021, the ECJ issued its decision in the case C-868/19 (M-GmbH). This case dealt with the question whether Members of a partnership and the head entity can form a VAT group.
Article in the EU VAT Directive
Article 11 (Taxable person – VAT grouping)
After consulting the advisory committee on value added tax (hereafter, the “VAT Committee”), each Member State may regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links.
A Member State exercising the option provided for in the first paragraph, may adopt any measures needed to prevent tax evasion or avoidance through the use of this provision.
The German court wanted to know if article 11 of the VAT Directive precludes national legislation which prohibits a partnership (in this case a limited liability partnership, the partners of which, apart from the controlling company, are not exclusively persons financially integrated into the controlling company’s undertaking) from being a ‘controlled company’ and eligible for VAT grouping?
- The applicant is the legal successor under the general title of PD GmbH & Co. KG.
- During the period relevant to the present proceedings, A-GmbH was its managing partner, and D-GbR, Mr C, Mr D, Mr E and M-GmbH were its silent partners.
- According to the partnership agreement, each partner had one vote. By way of derogation, M-GmbH had six votes.
- The managing partner of PD GmbH & Co. KG and M-GmbH had the same director during the period relevant to this case.
- After PD GmbH & Co. KG had not submitted a VAT return to the defendant before December 2017, the defendant estimated the taxable amount by decision of 09-05-2018 and at the same time set a fine for late submission.
- After the objection from PD GmbH & Co. KG was rejected, it brought an action before the referring court.
- The applicant considers that PD GmbH & Co. From December 2017, KG and M-GmbH formed a tax entity within the meaning of Paragraph 2 (2) (2) of the German Sales Tax Act.
- As a result, all transactions and VAT deductions for December 2017 are not for PD GmbH & Co. KG. KG, but should be attributed to M-GmbH and that the latter should have submitted the VAT declaration in question.
- Defendant indicates that there is no financial interdependence of PD GmbH & Co. KG and M-GmbH. Under German law, natural persons cannot participate in the partnership that is financially included in the enterprise of the parent body. Since natural persons are also silent partners of PD GmbH & Co. KG, financial interdependence is not possible.
- In the present case, the question arises as to whether the conditions for a tax entity within the meaning of Paragraph 2 (2) (2) of the German Law on turnover tax are met. It follows that only “entities with legal personality” are an enterprise entity. According to the highest German federal tax court, partnerships can also be regarded as an enterprise entity if their partners are, apart from the umbrella organization, only persons who are financially included in the enterprise of the umbrella organization. These cannot be natural persons. The referring court has doubts as to whether that conclusion is compatible with the requirements of Article 11 of the VAT Directive. According to the case-law of the Court, the first paragraph of Article 11 of the VAT Directive does not explicitly allow Member States to impose other conditions that economic operators must meet in order to be considered as a VAT group, nor does it explicitly provide for the possibility for Member States to provide that only entities with legal personality can participate belong to a VAT group. In addition, the Court has held that the measures referred to in the second paragraph of Article 11 of the VAT Directive can only be adopted in compliance with EU law and that Member States are free to apply the rules laid down in Article 11, subject to that reservation, first paragraph of that Directive in order to combat tax evasion or avoidance. The second question referred concerns the interpretation of that reservation.
Is the first paragraph of Article 11 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax — the VAT Directive 1 — to be interpreted as precluding the rule set out in point 2 of Paragraph 2(2) of the Umsatzsteuergesetz (German Law on turnover tax) — the UStG — in so far as that rule prohibits a partnership (in this case: a GmbH & Co. KG (a limited partnership in which the general partner is a limited liability company)) the partners of which, apart from the controlling company, are not exclusively persons financially integrated into the controlling company’s undertaking pursuant to point 2 of Paragraph 2(2) of the UStG, from being a controlled company within the scope of a tax-group arrangement for turnover-tax purposes?
If Question 1 is answered in the affirmative:
(a) Is the second paragraph of Article 11 of the VAT Directive — regard being had to the principles of proportionality and neutrality — to be interpreted as being capable of justifying an exclusion of partnerships of the type mentioned in Question 1 from a tax-group arrangement for turnover-tax purposes because, in the case of partnerships, there is no obligation to comply with a required form for the conclusion and amendment of partnership agreements under national law and there may, in the event of merely verbal agreements, be difficulties in proving the existence of the financial integration of the controlled company in individual cases?
(b) Is application of the second paragraph of Article 11 of the VAT Directive precluded if the national legislature did not have the intention of preventing tax evasion or avoidance already at the time when it adopted the measure?
Decision (Unofficial translation)
Article 11 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, read in the light of the principles of legal certainty, proportionality and fiscal neutrality, must be interpreted as precluding national legislation which makes the possibility for a partnership to form, together with the undertaking of the head body, a group of persons which may be regarded as a single taxable person for value added tax purposes subject to the condition that the members of the partnership, together with the head body, must be able to pay value added tax, which makes the possibility for a partnership to form, together with the undertaking of the head body, a group of persons who may be regarded as a single taxable person for value added tax purposes, subject to the condition that the members of the partnership, together with the head body, are only persons who are financially integrated in that undertaking.
Similar ECJ cases
- ECJ C-108/14 and C-109/14 (Larentia + Minerva) – VAT paid by holding companies for the acquisition of capital invested in their subsidiaries
- ECJ Case C-320/17 (Marle Participations) – Judgment – Involvement of a holding in management of subsidiaries; Letting of building by holding company to subsidiary
How did countries implement the case? Your feedback appreciated! Let us know
As mentioned before, in this respect, it is interesting to read the recent developments in the UK, which per 1 November 2019 extended VAT grouping to allow individuals and partnerships to join or form VAT groups with their corporate subsidiaries. See this article on marcusward.co