During the autumn meeting of the VAT Club, held on the 22nd of September in Vienna who was attended by our VAT Partner Raluca Tutu, one of the main topics of discussion was the ruling of the EU Court of Justice on Aviva case, which brought to much rumours and chaos within Cost Sharing Groups. Below we have captured the essence of the ruling and the impact on the economic sector, emphasizing the opinion of Advocate General J. Kokott.
ECJ Rules on VAT applicable to Cost Sharing Agreements and Groups
On September 21st 2017, The EU Court of Justice ruled on Aviva Case C 605/15 on the exemption for services supplied by an independent group of persons, in the light of article 132(1)(f) of the Council Directive 2006/112/EC. The answer of the Court in this respect was that the article 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 activity in the public interest referred to in article 132 of that directive and that, therefore, the services supplied by independent groups of persons whose members carry on an activity in the area of insurance, which does not constitute such an activity in the public interest, are not entitled to that exemption.
The ruling on Aviva Case C 605/15 has important implications across Cost Sharing Groups in the sense that the latter does not apply only to members who carry on an activity in the area of insurance but to all independent groups of persons engaged in Cost Sharing Agreements and result in a dramatic narrowing of the scope of the VAT exemption for cost sharing groups.
The opinion not only has serious implications for existing cost sharing groups, it also raises much broader and vital questions as to the proper extent of the principle of territoriality, and the relationship between EU VAT law and the domestic legal system of the member states, as well as between the VAT Directive and other tax regimes.
Aviva concerned shared service centres to be set up in the form of a European Economic Interest Group (EEIG) supplying cross-border services arguably directly necessary for insurance activities (HR, finance, accounting, IT, customer service, administration and product development).
The EEIG will not profit from its activity, in accordance with Article 3 of Regulation No 2137/85. The members of the EEIG will be exclusively companies from the Aviva Group carrying on an economic activity in the area of insurance, including Aviva.
In the earlier mentioned Judgement of the Court, the opinion of Advocate General (further “AG”) J. Kokott, has been taken into consideration, opinion that had the following key conclusions:
- The CSG exemption can only encompass supplies to members with activities in the ‘public interest’ included in the Principal VAT Directive (PVD) art 132. By implication, it does not cover the financial and insurance sectors (or indeed social housing, for which exemptions derive from art 135);
- Distortion of competition condition should be read in light of PVD art 131, which caters for the prevention of abuse;
In her view, appropriate use of the CSE should not lead to distortion of competition, as the purpose of the exemption is to remove a competitive disadvantage for small businesses that lack in-house resource to provide the services, or the ability to source services VAT free from VAT group members. One of the reasons for this is that a CSG only provides services to its members and as such does not compete on a wider open market. Rather than providing specific criteria to assess whether the application of the CSE would distort competition, the AG instead suggests three examples which cross the line and where the exemption would be inappropriate.
First, she suggests that CSGs providing services to non-members leverage their synergies to compete in the wider market. They should therefore be considered distortive, even though the services to non-members would not be exempt.
The second example is where the ‘primary purpose’ of forming the CSG is to optimise the input VAT burden, rather than establishing the conditions for ‘reciprocal cooperation’. This is a critical and difficult point. The exemption exists to reduce the burden on small operators. It does this by not levying VAT which is an obstacle to their reciprocal cooperation. Provided that the creation of a CSG is a commercially viable proposition, what is to prevent a taxpayer from choosing the option if it results in a lower incidence of VAT, even if that is the primary purpose?
Her third and last example indicates that if the services of the CSG are not tailored to the specific needs of its members, this may be an indication that the application of the CSE would distort competition as then the members would not have needed to cooperate to obtain these services.
In short, the ruling adopted by the EU Court of Justice means the end of the exemption provided by article 132(1)(f) of the Council Directive 2006/112/EC.
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