Provisional text
OPINION OF ADVOCATE GENERAL
RANTOS
delivered on 16 May 2024 (1)
Case C‑184/23
Finanzamt T
v
S
(Request for a preliminary ruling from the Bundesfinanzhof (Federal Finance Court, Germany))
(Reference for a preliminary ruling – Value added tax (VAT) – Sixth Directive 77/388/EEC – Article 2(1) and Article 4(4), second subparagraph – Scope of VAT – Taxable persons – Option for Member States to treat as a single taxable person entities that are legally independent but closely bound to one another by financial, economic and organisational links (‘VAT group’) – Supplies provided for consideration between members of the VAT group – Taxation of such supplies – Recipient of the supply not entitled to deduct VAT – Risk of tax losses)
I. Introduction
1. Do supplies of goods or services effected for consideration between persons forming part of a VAT group (2) (a VAT group’s ‘internal transactions’) fall within the scope of value added tax (VAT) and, if so, are they subject to VAT? Is the answer to that question different if the recipient of the supply of goods or services is not (or is only partly) entitled to deduct input tax?
2. Those, in essence, are the questions which the Court must address in the present case, which concerns a request for a preliminary ruling from the Bundesfinanzhof (Federal Finance Court, Germany) on the interpretation of Article 2(1) and the second subparagraph of Article 4(4) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment. (3)
3. The request for a preliminary ruling has been made in proceedings which have already given rise to a first request for a preliminary ruling, to which the Court responded in the judgment of 1 December 2022, Finanzamt T (Internal supplies within a VAT group) (C‑269/20, ‘the judgment in Finanzamt T I’, EU:C:2022:944). It was following that judgment and the judgment delivered on the same day in Norddeutsche Gesellschaft für Diakonie (C‑141/20, ‘the judgment in Diakonie’, EU:C:2022:943) that the referring court had the doubts which prompted it to make the present request for a preliminary ruling.
4. The present case therefore provides the Court with an opportunity, first, to provide further clarifications concerning the legal regime applicable to VAT groups, which has already been the subject of an extensive body of case-law, and, secondly, to clarify the scope of those two judgments.
II. Legal context
A. European Union law
5. The Sixth Directive was repealed and replaced, from 1 January 2007, by Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (4) (‘the VAT Directive’). However, in view of the date of the facts at issue in the dispute in the main proceedings, the dispute is still governed by the Sixth Directive.
6. Article 2 of the Sixth Directive provided:
‘The following shall be subject to [VAT]:
1. the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;
…’
7. Article 4(1) and (4) of the Sixth Directive provided:
‘1. “Taxable person” shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.
…
4. The use of the word “independently” in paragraph 1 shall exclude employed and other persons from the tax in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability.
Subject to the consultations provided for in Article 29, each Member State may treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organisational links.’
B. German law
8. Paragraph 2(2) of the Umsatzsteuergesetz (Law on Turnover Tax; ‘the UStG’), in the version applicable to the dispute in the main proceedings, is worded as follows:
‘The industrial activity, commercial activity, craft or professional activity is not exercised independently:
…
2. if, in the light of the overall actual circumstances, a legal entity is financially, economically and organisationally integrated into the undertaking of the controlling company (tax group). The effects of the affiliation are limited to internal supplies between the constituent parts of the undertaking located in the country. These constituent parts are to be treated as a single undertaking. …
…’
III. The dispute in the main proceedings, the questions referred for a preliminary ruling and the procedure before the Court
9. The facts in the main proceedings are identical to those set out in the judgment in Finanzamt T I. (5) For the purposes of the present proceedings, they may be summarised as follows.
10. S, a German foundation governed by public law, is the controlling company of both a university medicine department and the company U-GmbH (‘U-GmbH’). That foundation is liable for VAT in respect of the care services which it supplies for consideration but is not regarded as a taxable person for the teaching activities which it carries out in the exercise of its powers as a public authority. However, medical services are exempt from VAT under the Sixth Directive.
11. For the 2005 tax year, U-GmbH provided S, inter alia, with cleaning services. Those services were supplied for all of the building complex forming the university medicine department, which includes patients’ rooms, corridors, operating theatres, lecture rooms and laboratories.
12. The hospital area, as such, in so far as it is dedicated to patient care, falls within the sphere of the economic activities carried out by S, for which S is liable for VAT, whereas the lecture rooms, laboratories and other premises are used for the teaching of students, an activity which that foundation carries out in the exercise of its powers as a public authority and in respect of which it is not considered to be liable for that tax.
13. The proportion of the surface area of the building complex in question, for which cleaning services were supplied in respect of activities carried out by S as a public authority, amounted to 7.6% of the total surface area of that building complex. For those services, U-GmbH received remuneration amounting to a total of EUR 76 085.48 from S.
14. Following an audit, the tax authority adjusted S’s tax assessment for the tax year in question, taking the view that S’s establishments formed a single undertaking for which a single VAT return had to be drawn up and, therefore, a single tax assessment had to be issued.
15. Moreover, according to the tax authority, the cleaning services received by S in respect of activities falling within its powers as a public authority were supplied to it by U-GmbH as part of the tax group (Organschaft) which those entities formed, for the purposes of Paragraph 2(2)(2) of the UStG, which is intended to implement, in German law, the option, provided for in the second subparagraph of Article 4(4) of the Sixth Directive, to consider the members of a VAT group as a single taxable person.
16. The tax authority considered that the cleaning services provided in respect of the activities carried out as a public authority were, therefore, non-taxable, and that they would have been carried out for purposes other than that of the business and would have given rise to a ‘supply of services free of charge, treated as a supply of services for consideration’ to S. (6)
17. In the light of those factors, the tax authority formed the view, taking into account the 7.6% proportion of the surface area of the building complex in question, allocated to the activities carried out by S in the exercise of its powers as a public authority, that the sum corresponding to the cleaning of that proportion of the surface area by U-GmbH was EUR 5 782.50. After deduction of a profit mark-up, assessed at EUR 525.66, the tax authority set the taxable amount for the ‘supply of services free of charge’ at EUR 5 257 and thus increased the VAT by EUR 841.12.
18. The rejection of the administrative complaint lodged by S against that amended tax notice was the subject of an action before the Finanzgericht (Finance Court, Germany), which upheld that action.
19. The tax authority brought an appeal on a point of law against that judgment before the Bundesfinanzhof (Federal Finance Court), the referring court, which made the reference for a preliminary ruling to the Court of Justice which gave rise to the judgment in Finanzamt T I.
20. The referring court considers that a request for a preliminary ruling is again necessary in the proceedings currently before it.
21. According to that court, following the judgment in Diakonie, and in particular in the light of the reasoning set out in paragraphs 77 to 80 of that judgment, an uncertainty remains as to whether or not the bringing together of several persons considered as a single taxable person, as provided for in the second subparagraph of Article 4(4) of the Sixth Directive, has the effect of removing supplies made for consideration between those persons from the scope of VAT under Article 2(1) of that directive. Neither the judgment in Diakonie nor the case-law of the Court provides a clear answer as to the taxability of internal transactions.
22. The referring court also considers that doubts exist as to whether internal transactions within the context of a VAT group should, in any event, fall within the scope of VAT where the recipient of the supply of goods or services is not, or is only partly, entitled to deduct input VAT, as otherwise there would be a risk of tax losses. Those doubts arise from the judgments in Finanzamt T I and Diakonie, (7) in which the Court of Justice held that the second subparagraph of Article 4(4) of the Sixth Directive does not preclude the organisation of a VAT group such as that at issue under German law, in which the controlling company is designated as the single taxable person, only provided that this entails no risk of tax losses.
23. In those circumstances, the Bundesfinanzhof (Federal Finance Court) decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:
‘(1) Does the bringing together of several persons into a single taxable person, as provided for in the second subparagraph of Article 4(4) of [the Sixth Directive], have the effect of removing supplies of goods or services made for consideration between those persons from the scope of [VAT] as defined in Article 2(1) of that directive?
(2) Do supplies of goods or services made for consideration between those persons fall within the scope of [VAT] in any event in the case where the recipient of the supply of goods or services is not (or is only partly) entitled to deduct input tax, as there is otherwise a risk of tax losses?’
24. Written observations were submitted to the Court by S, the German Government and the European Commission.
IV. Analysis
25. By its two questions referred for a preliminary ruling, which should, in my view, be dealt with together, the referring court asks, in essence, whether Article 2(1) and the second subparagraph of Article 4(4) of the Sixth Directive must be interpreted as meaning that supplies of services effected for consideration between persons forming part of a VAT group – in accordance with the latter provision – do not fall within the scope of VAT, and whether this is the case, in any event, where the recipient of the supply of goods or services is not (or is only partly) entitled to deduct input tax, which would entail a risk of tax losses.
26. The two questions referred in the present case therefore seek to ascertain whether internal transactions between the members of a VAT group must be treated as transactions subject to VAT. In that regard, the Court has not yet had the opportunity to rule expressly on that question.
27. The referring court states that the doubts underlying those two questions arise from two recent judgments of the Court, namely the judgments in Finanzamt T I and Diakonie. It also states that, according to the Court’s case-law, internal transactions between members of a VAT group are not taxable.
28. However, it is apparent from a reading of the order for reference that the referring court tends to take the view that, under EU law, those internal transactions should be regarded as subject to VAT. By contrast, the three parties which submitted observations to the Court take the opposite view, that is to say, that such internal transactions do not fall within the scope of VAT.
29. The answer to the two questions referred for a preliminary ruling in the present case requires clarification of the interaction between Article 2(1) of the Sixth Directive, which, under that directive, determined the scope of VAT, and the second subparagraph of Article 4(4) of that directive, which permitted each Member State to allow economic operators established in the territory of that Member State to form a VAT group. (8) In order to determine the interaction between those two provisions, it is first necessary to interpret them.
30. In that context, it should be noted that, in accordance with settled case-law of the Court, in interpreting provisions of EU law, it is necessary to consider not only their wording but also their context and the objectives pursued by the legislation of which they form part. (9)
31. Furthermore, it follows from the need for uniform application of EU law and from the principle of equality that the terms of provisions of EU law, such as the provisions relevant to the present case, which make no express reference to the law of the Member States for the purpose of determining their meaning and scope must normally be given an autonomous and uniform interpretation throughout the European Union. (10)
A. The literal interpretation of the relevant provisions
32. The referring court considers that the wording of the relevant provisions in this case supports the view that internal transactions are taxable. That is apparent from the fact that Article 2(1) of the Sixth Directive makes no distinction, as regards taxability, between a VAT group’s internal transactions and the services supplied for consideration to third parties. According to the referring court, the interpretation of the second subparagraph of Article 4(4) of that directive permits, on the other hand, both the inference that internal transactions are taxable and the inference that they are not.
33. In that regard, so far as concerns, in the first place, Article 2 of the Sixth Directive, that provision, as recalled above, establishes the scope of VAT. (11) Article 2(1) thereof provides, inter alia, that the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such is to be subject to VAT.
34. Moreover, it is apparent from settled case-law that ‘a supply of services is taxable only if there exists between the service supplier and the recipient a legal relationship in which there is a reciprocal performance’, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient. (12)
35. It follows therefore explicitly from the wording of Article 2(1) of the Sixth Directive that, in order to fall within the scope of VAT, the supply of goods or services in question must be effected by ‘a taxable person’. It follows, a contrario, that if a supply of goods or services is effected by a person who cannot be regarded as a ‘taxable person’, that supply is not subject to VAT. Determining the scope of the concept of ‘taxable person’ is therefore of crucial importance for the purpose of determining whether or not certain transactions are taxable. (13)
36. The concept of ‘taxable person’ is defined, in general terms, in Article 4(1) of the Sixth Directive, under which taxable person is to mean any person who ‘independently’ carries out any economic activity specified in paragraph 2 of that article, whatever the purpose or results of that activity.
37. In that regard, it is clear from the case-law of the Court that, to ensure the uniform application of the Sixth Directive, the notion of ‘taxable person’ defined in Title IV thereof must be given an autonomous and uniform interpretation. (14)
38. So far as concerns, in the second place, the second subparagraph of Article 4(4) of the Sixth Directive, (15) it is apparent from its wording that that provision permits each Member State to regard a number of entities as a single taxable person if they are established in the territory of that Member State and if, although they are legally independent, they are closely bound to one another by financial, economic and organisational links. The application of that article is not, according to its wording, made subject to other conditions. Nor does it provide that the Member States are able to impose other conditions on economic operators in order to form a VAT group. (16)
39. According to settled case-law, the effect of implementing the scheme established in the second subparagraph of Article 4(4) of the Sixth Directive is that national legislation adopted on the basis of that provision allows entities which are bound to one another by financial, economic and organisational links no longer to be treated as separate taxable persons for the purposes of VAT but to be treated as a single taxable person. Thus, where that provision is implemented by a Member State, the closely linked entity or entities within the meaning of that provision cannot be treated as a taxable person or persons within the meaning of Article 4(1) of the Sixth Directive. (17)
40. It follows, also according to that settled case-law, that treatment as a single taxable person under the second subparagraph of Article 4(4) of the Sixth Directive precludes members of the VAT group from continuing to submit VAT declarations separately and from continuing to be identified, within and outside their group, as taxable persons, since the single taxable person alone is authorised to submit such declarations. That provision therefore necessarily requires, where it is implemented by a Member State, the national implementing legislation to provide that the taxable person is a single taxable person and that a single VAT number be allocated to the group. (18)
41. It therefore follows from the case-law of the Court to which I have just referred that where several legally independent persons form a VAT group within the meaning of the second subparagraph of Article 4(4) of the Sixth Directive, those persons are no longer treated as separate taxable persons and together constitute, for the purposes of VAT, a single taxable person. That single taxable person will be either the VAT group itself or – if provided for by the relevant national legislation and as the Court stated in the judgments in Finanzamt T I and Diakonie – one of its members, namely the controlling company of that group, where that controlling company is in a position to impose its will on the other entities forming part of that group and provided that its designation as a single taxable person for VAT purposes does not entail a risk of tax losses. (19)
42. It follows from the fact that a VAT group is considered as a single taxable person, pursuant to the wording of the second subparagraph of Article 4(4) of the Sixth Directive, that the supplies of services made by a third party to a member of the VAT group must be considered, for VAT purposes, to have been made not to that member but to the whole VAT group to which that member belongs (20) and vice versa. (21)
43. The literal analysis of the two relevant provisions which has been carried out, in the light of the case-law of the Court, in points 38 to 40 of this Opinion, makes it possible to determine the interaction between those two provisions.
44. That analysis shows, first, that under Article 2(1) of the Sixth Directive, in order for a supply of goods or services to fall within the scope of VAT, it must be carried out by a ‘taxable person’. Secondly, that analysis also shows that the VAT group is a single taxable person and that the entities belonging to that VAT group are no longer treated, individually, as separate taxable persons. The necessary coordination between those two findings supports a combined interpretation of the two provisions, to the effect that internal transactions, that is to say, services provided for consideration between the members of a VAT group, do not fall within the scope of VAT.
45. Indeed, the opposite approach, according to which services supplied by one member of the VAT group to another member of the same VAT group (or to the VAT group itself) would constitute transactions subject to VAT under Article 2(1) of the Sixth Directive, would presuppose that that member was a taxable person under that provision, which is incompatible with the nature of the VAT group as a single taxable person, as established in the wording of the second subparagraph of Article 4(4) of that directive and in the settled case-law of the Court referred to in points 38 to 40 of this Opinion.
46. The establishment of a VAT group initiates the tax liability of the VAT group and terminates the separate tax liability of those of its members who were taxable persons for VAT purposes before joining the group, and the VAT treatment of the group’s transactions, both between entities within the VAT group and to and from entities outside the group, is comparable to the VAT treatment of a single taxable person operating individually. (22)
47. It follows that a person which, by reason of the fact that it belongs to a VAT group, is no longer treated as a taxable person for VAT purposes cannot be considered as carrying out, on an individual basis, a taxable supply of goods or services either outside the group, that is to say, to third parties, or within the VAT group to which it belongs, that is to say, to other members of the same group. Outside the VAT group, the supply of goods or services will be considered, for VAT purposes, as having been made by the single taxable person, that is to say, in principle, the VAT group itself, which will be liable for the tax relating thereto. (23) Within the group, internal transactions between the individual members of the group are considered as having been carried out by the group for itself and, consequently, do not exist for VAT purposes. (24) As (reciprocal) transactions between entities forming part of a single taxable person, they constitute, for VAT purposes, non-taxable ‘internal flows of funds’, unlike taxable transactions carried out with third parties. (25)
48. Such an interpretation of the relevant provisions, as is apparent from their literal analysis, is also consistent, first, with the interpretation in the Guidelines resulting from the 119th meeting of the VAT Committee of 22 November 2021, (26) which, though not binding, nevertheless constitute, according to the case-law of the Court, an aid to the interpretation of the Sixth Directive. (27) Secondly, it is also consistent with the interpretation in the Commission’s 2009 communication on VAT groups. (28)
49. Accordingly, it must next be ascertained whether the interpretation of the relevant provisions resulting from their literal analysis, in the light of the case-law of the Court, is confirmed by their contextual and teleological interpretation.
B. The contextual interpretation of the relevant provisions
1. The contextual analysis
50. The referring court considers that the contextual analysis of the relevant provisions also supports the view that internal transactions are taxable. The members of the VAT group carry out their internal transactions in the course of an ‘independent economic activity’, as set out in Article 4(1) of the Sixth Directive. In its view, the Court’s answer to the fourth question referred in the judgment in Diakonie appears to confirm that analysis.
51. In order to address the doubts raised by the referring court from a contextual perspective, it is necessary to consider the relationship between, on the one hand, the condition that an economic activity be carried out ‘independently’, to which the general definition of a taxable person set out in Article 4(1) of the Sixth Directive refers, and, on the other hand, the VAT group scheme deriving from the second subparagraph of Article 4(4) of that directive.
52. In that regard, from a contextual perspective, it should first of all be noted that Article 4 is the only article in Title IV of the Sixth Directive, entitled ‘Taxable persons’. As regards the structure of that article, the first paragraph thereof contains the general definition of a taxable person, whilst, as the Commission rightly points out, the other provisions circumscribe and clarify that general concept by including or excluding certain cases.
53. In particular, as regards the condition that the economic activity must be carried out ‘independently’, its scope is clarified in the first subparagraph of Article 4(4) of the Sixth Directive, according to which the word ‘independently’ excludes VAT being imposed on employed and other persons in so far as they are bound to an employer by a contract of employment ‘or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability’.
54. It is also clear from the case-law of the Court that, as regards the context of the second subparagraph of Article 4(4) of that directive, it is not apparent from either that provision or the system established by that directive that it is a derogating or special provision which must be interpreted narrowly. Accordingly, the condition relating to the existence of a close financial link cannot be interpreted narrowly. (29)
55. In addition, the Court has expressly held that the autonomous and uniform interpretation of the notion of ‘taxable person’, referred to in point 37 of this Opinion, is also necessary for that provision despite the optional nature, as regards the Member States, of the scheme that that provision provides, in order to avoid differences in application of that scheme between one Member State and another when it is implemented. (30)
56. As regards the clarification of the general concept of ‘taxable person’ (as indicated in point 52 of this Opinion) set out in the second subparagraph of Article 4(4) of the Sixth Directive, it explicitly provides that – as follows from the literal analysis set out above – if the conditions laid down by that provision are satisfied, a VAT group forms, on the basis of a legal fiction, a single taxable person for VAT purposes. That ‘mechanism’ presupposes that that single taxable person takes the place of the individual members as taxable person for VAT purposes, irrespective of whether or not those members independently carry out an economic activity as provided for in Article 4(1) of the Sixth Directive.
57. In that regard, it should be noted that, in its case-law, the Court has already had occasion to state that the condition that an economic activity be carried out ‘independently’ for the purposes of classification as a taxable person under Article 4(1) of the Sixth Directive is a legal question distinct from that of the categorisation of the VAT group as a single taxable person and that those two questions are not necessarily related. Moreover, that was, in my view, the context of the Court’s answer to the fourth question referred in the judgment in Diakonie which gave rise to the doubts of the referring court. I shall therefore first examine the case-law referred to above before then analysing the relevant part of the judgment in Diakonie.
2. The case-law on the relationship between the condition to carry out an economic activity ‘independently’ and the VAT group scheme
58. The first question referred to the Court in the case giving rise to the judgment in Skandia (31) concerned whether supplies of services from a main establishment in a third country to its branch in a Member State constituted transactions subject to VAT where that branch belongs to a VAT group.
59. As a general rule, according to the case-law of the Court, a main establishment and a branch constitute one and the same taxable person for VAT purposes, unless it is established that the branch carries out an independent economic activity. (32)
60. In that context, the Court began by analysing first of all whether or not, in the case in point, the branch was operating independently. It found that this was not the case and that that branch therefore could not itself be characterised as a taxable person within the meaning of the VAT Directive. (33)
61. Nevertheless, the Court held that, since that branch belonged to a VAT group and thus formed with the other members of that group a single taxable person, which was distinct from the main establishment, for VAT purposes, the services supplied by the main establishment to its – non-independent – branch, which was a member of a VAT group, were considered not to be supplied to that branch but had to be regarded as being supplied to the VAT group and therefore constituted transactions subject to VAT. (34)
62. The Court subsequently confirmed that case-law in the Danske Bank case, (35) in which it applied the same principle to what might be described as the ‘reverse’ situation, in which it was the main establishment which belonged to a VAT group.
63. That case-law shows that although carrying out an economic activity ‘independently’ is, according to the very wording of Article 4(1) of the Sixth Directive, necessary for a person to be classified as a taxable person, this does not prevent an entity which does not satisfy that condition from nonetheless falling within the scope of VAT where it belongs to a VAT group and thus is part of a single taxable person within the meaning of Article 4(4) of that directive.
64. The question of compliance with the condition that an economic activity be carried out ‘independently’, set out in Article 4(1) of that directive, and the legal consequences of belonging to a VAT group thus constitute two distinct legal questions which are not necessarily connected. Accordingly, compliance or non-compliance with that condition has no bearing on those consequences.
3. The Court’s answer to the fourth question referred in the judgment in Diakonie
65. It is against that background of interaction, indeed tension, between the condition relating to the independent nature of an economic activity under Article 4(1) of the Sixth Directive and the legal scheme governing VAT groups that it is necessary to examine the fourth question which was analysed by the Court in the judgment in Diakonie.
66. That question was referred to the Court in a situation in which the (again German) national legislation at issue provided that the single taxable person for VAT purposes was not the VAT group as such, but a member thereof, namely its controlling company, to which all the turnover achieved by the entities forming part of the VAT group was attributed and which is liable for the VAT corresponding to all of that turnover. (36)
67. Moreover, according to that national legislation, the economic and professional activities of the entities integrated into the controlling company of the tax group of which those entities formed part were not regarded as being carried out independently, (37) on account of the relationship of authority and subordination, (now) classified as an ‘integration together with rights to intervene’, between the controlling company and the other entities. (38)
68. In that context, the referring court (the same as that in the present case) had raised, in particular, a question concerning the possibility of treating, by categorisation, that is to say, ‘en bloc’, the entities forming part of the VAT group as non-independent for the purposes of Article 4(1) of the Sixth Directive on the basis of that relationship of subordination.
69. That court had asked in particular whether Article 4(1) and the first subparagraph of Article 4(4) (39) of the Sixth Directive permitted a Member State to regard, by categorisation, a person as not being independent within the meaning of Article 4(1) of that directive if that person forms part of a VAT group in such a way that the controlling company was able to impose its will on the person and thus prevent the person from forming his or her own will, which diverges from that of the controlling company.
70. It was in that context that the Court held that the second subparagraph of Article 4(4) of the Sixth Directive, read in conjunction with the first subparagraph of Article 4(1) of that directive, should be interpreted as precluding a Member State from classifying, by categorisation, given entities as non-independent, where those entities are integrated, in financial, economic and organisational terms, into the controlling company of a VAT group.
71. In other words, the Court held that the fact that an entity is a member of a VAT group cannot be regarded as automatically meaning that that entity does not carry out economic activities ‘independently’ under Article 4(1) of the Sixth Directive.
72. The judgment in Diakonie therefore confirms, in accordance with the case-law referred to in points 58 to 64 of this Opinion, that the condition relating to the carrying out of an economic activity independently within the meaning of Article 4(1) of that directive and the consequences arising from an entity’s membership of a VAT group are distinct legal questions and that membership of such a group has no bearing on the definition of an independent economic activity under Article 4(1) of that directive.
73. Accordingly, the judgment in Diakonie in no way calls into question the characterisation of a VAT group as a single taxable person, having regard to the considerations and case-law referred to in points 38 to 42 of this Opinion, case-law to which that judgment expressly refers. It follows that that judgment cannot call into question the consequences of that characterisation, as set out in points 43 to 47 of this Opinion, in the light of the classification of the VAT group and its members as taxable person for VAT purposes, both outside and within the group itself. (40)
74. Moreover, in the case which gave rise to the judgment in Diakonie, the Court did not have to address, and therefore did not rule on, the question of whether or not the VAT group’s internal transactions were taxable for VAT purposes.
75. In the light of the foregoing contextual analysis and the relevant case-law mentioned above, even if persons belonging to a VAT group ‘independently’ carry out economic activities within the meaning of Article 4(1) of the Sixth Directive, this has no bearing on the fact that, because they belong to a VAT group, those persons together constitute, for VAT purposes, a single taxable person and thus are no longer treated as separate taxable persons for the purposes of VAT, either in the external relationships or in the internal relationships within the VAT group.
76. It follows that, contrary to the view taken by the referring court, the fact that the members of the VAT group carry out their internal transactions in the course of an ‘independent economic activity’, as provided in Article 4(1) of the Sixth Directive, does not support the argument that those internal transactions are taxable and cannot call into question the interpretation of the relevant provisions referred to in points 43 to 47 of this Opinion.
C. The teleological interpretation of the relevant provisions
77. The referring court considers that the objectives pursued by the second subparagraph of Article 4(4) of the Sixth Directive should not require non-taxation of internal transactions. The procedural simplification intended to ensure that, on account of the establishment of the VAT group, it is no longer necessary to lodge several tax returns should have no influence on the chargeability of the tax, with the result that internal transactions are subject to VAT. If, on the other hand, the abovementioned simplification is substantive in nature, this would be understandable where the member of the group benefiting from the internal transaction is entitled to deduct input VAT, so that the tax liability and the right to deduct input VAT offset each other. However, a general non-taxation of internal transactions, which applied also where the member of the group which benefits from the internal transaction is not entitled to deduct input VAT, would lead to tax losses and, ultimately, not to administrative simplification but to no tax being levied. Nor does the objective of preventing certain abuses justify the non-taxation of internal transactions. On the contrary, it could be regarded as constituting abuse for members of the group which are not entitled to deduct VAT to obtain a tax advantage.
78. In order to address the doubts expressed by the referring court, it is necessary to determine the rationale, that is to say, the justification, for VAT grouping, as provided for in the second subparagraph of Article 4(4) of the Sixth Directive.
79. In that regard, it should be recalled that, as regards the objectives pursued by the second subparagraph of Article 4(4) of the Sixth Directive, the Court has stated that it is apparent from the Commission proposal which resulted in the adoption of that directive (COM(73) 950 final) that the EU legislature, by adopting that provision, intended, either in the interests of simplifying administration or with a view to combating abuses such as the splitting-up of one undertaking among several taxable persons so that each might benefit from a special scheme, to ensure that Member States would not be obliged to treat as taxable persons those whose ‘independence’ is purely a legal technicality. (41)
80. The referring court expressly refers to that case-law of the Court, but focuses exclusively on the objectives of simplifying administration and combating abuses. However, as is clear from the preceding point, VAT grouping is primarily intended to ensure that Member States are not obliged to treat as taxable persons those whose ‘independence’ is purely a legal technicality. It is thus expressly an instrument which allows Member States to distinguish the issue of VAT liability from that of the legal organisation of undertakings.
81. In that regard, it should be noted that VAT liability can and does have an impact on the structure and functioning of economic operators. (42) It may influence the organisational choices made by undertakings. Accordingly, an undertaking may choose either to in-source certain supplies of goods or services, using an internal operational unit of the undertaking itself, or to outsource them to an entity which is legally distinct but belongs to the group (for example, a production or services company). (43) Accordingly, the question of whether an economic operator’s activities are in-sourced or outsourced (within the group) may depend not only on operational or economic considerations, but may also have to take account of consequences arising from VAT liability.
82. However, in principle, it should not be relevant to take into account for VAT purposes whether part of an undertaking’s activity is outsourced to a separate entity (potentially a separate taxpayer) forming part of the group or whether it is carried out by an internal operating unit of a larger undertaking. In fact, it is the activity and not the legal form that defines status as a taxable person for VAT purposes. (44)
83. VAT grouping therefore allows the Member States to diminish the influence of VAT on the way economic operators organise themselves. Thus, VAT grouping supports ‘organisational’ fiscal neutrality by enabling appropriate business structures without negative consequences in terms of VAT liability. (45) However, subject to the considerations set out in point 85 of this Opinion, that function presupposes that the group’s internal transactions are not taxable. It is only if the tax regime relating to VAT is the same where the supply is in-sourced or outsourced (within the group) that the ‘organisational’ fiscal neutrality referred to above can be guaranteed.
84. The observation that the objective of guaranteeing ‘organisational’ fiscal neutrality is the fundamental and original function of VAT grouping follows not only from the wording of the case-law of the Court cited in point 78 of this Opinion, but also from the origin of the provision which provides for it. The concept of a VAT group was introduced into EU law by Second Council Directive 67/228/EEC, (46) based on the German ‘Organschaft’ legislation, (47) the core element of which, as the referring court also points out, (48) was the non-taxable nature of internal transactions in order to avoid the cumulation of taxes. That concept has subsequently evolved through successive amendments made by the Sixth Directive and, most recently, by the VAT Directive. (49)
85. However, as noted by the referring court, the function of guaranteeing ‘organisational’ fiscal neutrality lost some of its importance when the possibility of deducting input VAT was introduced. Should such a possibility exist, the tax liability and the right to deduct input VAT offset one other, with the result that, where such deduction is possible, the VAT group scheme has no material scope and its justification lies fundamentally in administrative simplification of a procedural nature. In that regard, it should be noted that that administrative simplification also benefits the tax authorities as it enables them to avoid a number of checks.
86. The objective of guaranteeing the ‘organisational’ fiscal neutrality of that scheme nevertheless remains entirely valid for undertakings which do not have the right to deduct input VAT. For those undertakings, if the Member State in question has made use of the option of permitting the establishment of VAT groups – and provided that the internal transactions are not taxable – it is immaterial whether those undertakings supply the goods or services themselves or through a controlled undertaking. In both cases, those supplies of goods or services will not be burdened by VAT. (50) It is therefore precisely for those undertakings that the rationale for guaranteeing ‘organisational’ fiscal neutrality remains valid. Accordingly, for those undertakings, VAT grouping not only has a procedural scope, as an administrative simplification, but also retains a material scope. (51)
87. In that context, it is relevant to recall that, in the judgment of 9 April 2013, Commission v Ireland (C‑85/11, EU:C:2013:217), the Grand Chamber of the Court of Justice expressly held that there was no reason, in particular in the light of the objectives of the provision of the VAT Directive providing for VAT groups, to consider that non-taxable persons, which cannot therefore charge VAT, could not be included in a VAT group. (52)
88. Finally, as regards the risk of alleged tax losses mentioned by the referring court, I would note the following.
89. First, it is not relevant to rely on the judgments in Finanzamt T I and Diakonie, and paragraphs 50 and 57 thereof respectively, to support the argument that internal transactions between members of a VAT group are taxable concerning a risk of tax losses. On the one hand, in those judgments, the Court did not examine the question whether internal transactions are taxable. On the other hand, it is clear from a reading of those judgments, by contrast, that the Court’s reference therein to the risk of tax losses, far from being a general reference, was limited to the issue of attribution of the role of a single taxable person, under the national legislation at issue, to the VAT group’s controlling company and not to the VAT group as such. The Court held that it is precisely that attribution which should not entail a risk of tax losses. It follows that it is only if, in accordance with national law, the attribution of that role leads to the same result as if the VAT group as such were regarded as the single taxable person for VAT purposes – and if there is therefore no risk of tax receipts relating to services provided and received by members of the group not being covered – that it would be possible to attribute the status of single taxable person to the group’s controlling company. It is clear that that reasoning has no connection with the issue of whether a VAT group’s internal transactions are taxable.
90. Secondly, I note that, in the case which gave rise to the judgment in Commission v Ireland referred to above, in order to prove the infringement alleged against the Member State in question, the Commission had raised arguments based on the risk of tax losses arising from the possibility for non-taxable persons to join a VAT group, which coincided with, in essence, the doubts raised by the referring court. (53) However, the Court did not accept those arguments and dismissed the action brought by the Commission, which demonstrates that it has already considered that line of argument to be irrelevant.
91. Thirdly, I have doubts as to whether, in fact, the risk of tax losses envisaged by the referring court actually exists. In support of its uncertainties as to the existence of such a risk of tax losses, that court makes a comparison between the two liabilities to tax connected with the legal positions arising in the presence and in the absence of a tax group as provided for in Article 4(4) of the Sixth Directive. (54) However, in the light of points 81 to 83 and 86 of this Opinion, the member of the group which benefits from the internal transaction and which is not entitled to deduct VAT could, in reality, choose to ‘in-source’, using one of the undertaking’s internal organisational units, the supply of goods or services received by members of the VAT group, so that the result of the transaction, for VAT purposes, would, in any event, be identical. Thus, for example, in this instance, the hospital at issue in the case in the main proceedings could still have cleaning services carried out by an internal unit rather than ‘outsourcing’ them to a legal entity forming part of the VAT group. For the purposes of VAT, nothing would change. Rather, that hospital would be encouraged to opt for such a solution so as not to have to pay VAT, if there was no VAT grouping without the taxation of internal supplies. In such a situation, however, the aforementioned ‘organisational’ fiscal neutrality would not be guaranteed.
92. From that point of view, if there is no tax advantage for the members of the group which are not entitled to deduct VAT, the doubts of the referring court concerning the objective of the VAT group scheme consisting in preventing certain abuses are not justified.
93. It follows from all the foregoing considerations that, contrary to the view of the referring court, the objectives pursued by the second subparagraph of Article 4(4) of the Sixth Directive, read in conjunction with Article 2(1) thereof, do not preclude an interpretation of those provisions, to the effect that a VAT group’s internal transactions are not subject to VAT.
V. Conclusion
94. In the light of the foregoing considerations, I propose that the Court answer the questions referred for a preliminary ruling by the Bundesfinanzhof (Federal Finance Court, Germany) as follows:
Article 2(1) and the second subparagraph of Article 4(4) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 2000/65/EC of 17 October 2000,
must be interpreted as meaning that supplies of services for consideration between persons forming part of a group formed by legally independent persons, but closely bound to one another by financial, economic and organisational links, under the second subparagraph of Article 4(4) of Sixth Council Directive 77/388, as amended by Directive 2000/65, do not fall within the scope of value added tax (VAT), even where the recipient of the supply of goods or services is not (or is only partly) entitled to deduct input VAT.