On September 21, 2017, the ECJ issued its decision in the case C-326/15 (DNB Banka).
Context: Reference for a preliminary ruling — Taxation — Value added tax — Directive 2006/112/EC — Article 132(1)(f) — Exemptions for certain activities in the public interest — Exemption for the supply of services by independent groups of persons for their members — Applicability to financial services
Article in the EU VAT Directive
Articles 132, 132(1)(f) of the EU VAT Directive 2006/112/EC
Article 132 (Exemptions for Certain Activities in the Public Interest)
1. Member States shall exempt the following transactions:
(a) the supply by the public postal services of services other than passenger transport and telecommunications services, and the supply of goods incidental thereto;
(b) hospital and medical care and closely related activities undertaken by bodies governed by public law or, under social conditions comparable with those applicable to bodies governed by public law, by hospitals, centres for medical treatment or diagnosis and other duly recognised establishments of a similar nature;
(c) the provision of medical care in the exercise of the medical and paramedical professions as defined by the Member State concerned;
(d) the supply of human organs, blood and milk;
(e) the supply of services by dental technicians in their professional capacity and the supply of dental prostheses by dentists and dental technicians;
(f) the supply of services by independent groups of persons, who are carrying on an activity which is exempt from VAT or in relation to which they are not taxable persons, for the purpose of rendering their members the services directly necessary for the exercise of that activity, where those groups merely claim from their members exact reimbursement of their share of the joint expenses, provided that such exemption is not likely to cause distortion of competition;
(g) the supply of services and of goods closely linked to welfare and social security work, including those supplied by old people’s homes, by bodies governed by public law or by other bodies recognised by the Member State concerned as being devoted to social wellbeing;
(h) the supply of services and of goods closely linked to the protection of children and young persons by bodies governed by public law or by other organisations recognised by the Member State concerned as being devoted to social wellbeing;
(i) the provision of children’s or young people’s education, school or university education, vocational training or retraining, including the supply of services and of goods closely related thereto, by bodies governed by public law having such as their aim or by other organisations recognised by the Member State concerned as having similar objects;
(j) tuition given privately by teachers and covering school or university education;
(k) the supply of staff by religious or philosophical institutions for the purpose of the activities referred to in points (b), (g), (h) and (i) and with a view to spiritual welfare;
(l) the supply of services, and the supply of goods closely linked thereto, to their members in their common interest in return for a subscription fixed in accordance with their rules by non-profit-making organisations with aims of a political, tradeunion, religious, patriotic, philosophical, philanthropic or civic nature, provided that this exemption is not likely to cause distortion of competition;
(m) the supply of certain services closely linked to sport or physical education by nonprofit-making organisations to persons taking part in sport or physical education;
(n) the supply of certain cultural services, and the supply of goods closely linked thereto, by bodies governed by public law or by other cultural bodies recognised by the Member State concerned;
(o) the supply of services and goods, by organisations whose activities are exempt pursuant to points (b), (g), (h), (i), (l), (m) and (n), in connection with fund-raising events organised exclusively for their own benefit, provided that exemption is not likely to cause distortion of competition;
(p) the supply of transport services for sick or injured persons in vehicles specially designed for the purpose, by duly authorised bodies;
(q) the activities, other than those of a commercial nature, carried out by public radio and television bodies.
2. For the purposes of point (o) of paragraph 1, Member States may introduce any restrictions necessary, in particular as regards the number of events or the amount of receipts which give entitlement to exemption.
- DNB Banka is a credit institution, established in Latvia, which provides financial services.
- DNB Banka is a subsidiary of DNB NORD A/S (now DNB INVEST DENMARK A/S), a company established in Denmark, which also owns two other subsidiaries, AB DNB NORD Bankas, a Lithuanian company, and Bank DNB Polska SA, a Polish company, as well as an Estonian branch, DNB NORD Pank. All those entities, which are active in the area of financial services, make up the DNB Group.
- DNB NORD is also the sole owner of DNB NORD IT A/S (now, after restructuring, DNB INVEST DENMARK) (‘DNB IT’), a company established in Denmark tasked with providing support in the area of information technology.
- DNB NORD is a subsidiary of DNB Bank ASA, established in Norway, and of NORD/LB Norddeutsche Landesbank, established in Germany. Both those companies form a joint undertaking through which DNB Bank holds 51% of the shares in the DNB Group.
- On 31 August 2006, DNB Banka concluded a contract with DNB NORD for the provision of financial services. Under that contract, DNB NORD provides services to DNB Banka on a continuous basis and to the extent necessary, ensuring the group’s joint functions and responding to specific requests from DNB Banka as its subsidiary. On the basis of that contract, DNB Banka received, in 2009 and 2010, a number of invoices pertaining to the management services provided by DNB NORD. According to the documentation relating to the transfer pricing, drawn up in 2011, DNB NORD applied a 5% uplift, in 2009 and 2010, to the pricing for the provision of management services.
- On 30 April 2009, DNB Bank, in agreement with DNB Banka, concluded a contract with Microsoft Ireland Operations Ltd relating to the purchase of products and licences marketed by Microsoft for the needs of DNB Bank and its connected undertakings. Under that contract, DNB Bank receives an invoice from Microsoft Ireland Operations for software purchased which all of the undertakings in the DNB Group use. Subsequently, DNB Bank allocates the relevant costs to the other undertakings in the DNB Group on the basis of the specific programs which each undertaking has received. In 2009 and 2010, DNB Banka thus received invoices pertaining to the licences marketed by Microsoft.
- On 20 December 2010, DNB IT concluded a contract relating to information technology management with DNB NORD and with its subsidiaries, according to which DNB IT is the only entity in the DNB Group to provide services connected with information technology projects. In 2010 and 2011, DNB IT, on the basis of that contract, sent a number of invoices to DNB Banka for the information technology services thus provided. According to the items relating to costs referred to in those invoices, an uplift of 5% was applied to the pricing of those services.
- DNB Banka was the subject of a tax inspection in which it maintained that the transactions concerned were exempt from VAT. The administrative procedure was concluded with a decision of the Director General of the VID of 9 July 2012, in which she rejected DNB Banka’s request that its VAT declarations relating to the transactions concluded with DNB NORD, DNB IT and DNB Bank be corrected.
- That decision is based on the following considerations. In the first place, as regards the transactions carried out between DNB Banka and DNB NORD, the VID found that there were no documents which made it possible to identify clearly the persons which formed the IGP, for the purposes of Article 132(1)(f) of Directive 2006/112. The VID considered that the fact that there was a group of connected undertakings whose members provided each other with services did not demonstrate the existence of an IGP, for the purposes of that provision.
- In the second place, the VID, referring to recital 7 of Directive 2006/112, took the view that the transactions carried out between DNB Banka and DNB IT amounted to unfair competition. That assessment is based on the fact that the service provider, DNB IT, is liable to pay tax for the information technology services in question in its Member State of establishment, in accordance with general arrangements, and that the input tax on those services has been deducted, while DNB Banka, as recipient of those services, is not liable to pay tax for those same services, as they are considered to be exempt from VAT.
- In the third place, as regards the transactions carried out between DNB Banka and DNB Bank, the VID was unable to identify specifically the persons which, according to DNB Banka, had to be classified as members of the IGP for whose services exemption was invoked. In addition, according to the VID, there is no justification for considering that DNB Bank had to be classified as a member of that IGP carrying on an activity exempt from VAT.
- DNB Banka submitted an application to the administratīvā rajona tiesa (District Administrative Court, Latvia) for an order requiring the VID to correct its VAT declarations relating to the transactions conducted with DNB NORD, DNB IT and DNB Bank. That court dismissed that application by decision of 1 November 2013.
- DNB Banka lodged an appeal against that decision before the Administratīvā apgabaltiesa (Regional Administrative Court, Latvia), claiming that all the criteria referred to in Article 132(1)(f) of Directive 2006/112 had been fulfilled. According to DNB Banka, the administratīvā rajona tiesa (District Administrative Court) did not interpret Article 132(1)(f) of Directive 2006/112 correctly when it dismissed its application on the ground that the total amount of the invoice also included an uplift, without examining the reasons justifying the existence of that uplift. DNB Banka maintains that that uplift was included in compliance with the guidelines of the Organisation for Economic Co-operation and Development (OECD) and with the requirements of corporation tax legislation, and consequently the application of such an uplift cannot be used as a ground for refusing an exemption from VAT.
- Is it possible for there to be an independent group of persons for the purposes of Article 132(1)(f) of the Directive, 1 when the members of that group are established in separate Member States of the European Union, in which that provision of the Directive has been transposed with different requirements which are not compatible?
- Can a Member State restrict the right of a taxable person to apply the exemption provided for in Article 132(1)(f) of the Directive, when that taxable person has satisfied all the requirements for the application of the exemption in its Member State, but that provision of the Directive has been transposed into the national law of the Member States of other members of the group with restrictions which limit the possibility for taxable persons of other Member States of applying in their own Member State the corresponding exemption from value added tax?
- Is it permissible to apply the exemption in Article 132(1)(f) of the Directive to services in the Member State of the recipient of those services, who is a taxable person for value added tax, when the provider of the services, also a taxable person for value added tax, has applied in another Member State value added tax to those services in accordance with general arrangements, that is, considering that value added tax on those services was payable in the Member State of the recipient of those services, in accordance with Article 196 of the Directive?
- Must the term ‘independent group of persons’, for the purposes of Article 132(1)(f) of the Directive, be taken to mean a separate legal person whose existence has to be proved through a specific agreement creating that independent group of persons?
- If the reply to that question is that an independent group of persons need not necessarily be taken to mean a separate entity, is an independent group of persons to be regarded as a group of related undertakings in which, in the course of their usual economic activities, those undertakings provide each other with support services for carrying out their commercial activities, and may the existence of that group be proved through the contracts for services concluded or through documentation on transfer prices?
- Can a Member State restrict the right of a taxable person to apply the value added tax exemption in Article 132(1)(f) of the Directive, when that taxable person has applied an uplift to the transactions, as required under the legislation on direct taxation of the Member State where the taxable person is established?
- Does the exemption in Article 132(1)(f) of the Directive apply to services received from third countries? In other words, where a member of an independent group of persons, as referred to in Article 132(1)(f) of the Directive, provides, within that group, services to other members of the group, can that person be a taxable person from a third country?
(1) An independent group of persons for the purposes of Article 132(1)(f) does not have to be a legal person, but a taxable person within the meaning of Article 9(1) of the VAT Directive. A group of related companies does not as such satisfy this requirement.
(2) Article 132(1)(f) covers, for the present purposes, only groups of taxable persons which carry out exempt transactions in accordance with Article 132(1) of the VAT Directive. Groups of financial services undertakings do not therefore fall within the scope of Article 132(1)(f) of the VAT Directive.
(3) The independent group of persons may supply exempt services only to members that are subject to the same legal order, namely its own.
(4) The exemption under Article 132(1)(f) of the VAT Directive is not applicable where a consideration is paid for the supply of services which goes beyond the expenses incurred. That is also the case where, as required under the legislation on direct taxation, a simple flat-rate cost uplift is paid.
Article 132(1)(f) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted to the effect that the exemption provided for in that provision relates only to independent groups of persons whose members carry on an activity in the public interest referred to in Article 132 of that directive and that, therefore, the services supplied by a group whose members carry on an economic activity in the area of financial services, which does not constitute such an activity, in the public interest are not entitled to that exemption.
DNB Banka is a Latvian credit institution providing financial services. It is part of the DNB group with offices in several Member States. The Danish DNB IT has the task of providing IT support and is the only company of the DNB Group that provides services related to IT projects. On that basis, DNB IT has issued various invoices to DNB Banka for the IT services provided to it with a profit mark-up of 5%. According to DNB Banka, the services in question were exempt from VAT.
The ECJ disagrees. The exemption provided for in Article 132(1)(f) of the VAT Directive (umbrella exemption) applies only to independent groups of persons whose members carry out an activity in the public interest within the meaning of Article 132, so that services provided by a group whose members engage in an economic activity in the field of financial services, which is not such an activity in the public interest, are not eligible for that exemption.
Similar ECJ cases
- Roadtrip through ECJ Cases – Focus on ”Exemption of supply of services by independent groups of persons” (Art. 132(1)(f))
Reaction from Luxembourg on the ECJ Case
The introduction of a new section 9 regarding VAT groups arises from decisions of the Court of Justice of the European Union (CJEU), in particular,the case law of 21 September 2017 in the matters of Minister Finansów v. Aviva Towarzystwo Ubezpieczeń na Życie S. A . w Warszawie (C-605/ 15), DNB Banka AS v. Valsts ieņēmumu dienests (C-326/15) and European Commission v. Federal Republic of Germany (C-616/15) and the case law of 04 May 2017 in the matter of European Commission v. Grand Duchy of Luxembourg (C-274/15).
Reference to the case in the ECJ Member States