Provisional text
OPINION OF ADVOCATE GENERAL
KOKOTT
delivered on 10 July 2025 (1)
Joined Cases C‑379/24 and C‑380/24
Agrupació de Neteja Sanitària, AIE (C‑379/24),
Educat Serveis Auxiliars SCCL (C‑380/24)
v
Tribunal Económico-Administrativo Regional de Cataluña (TEARC)
(Requests for a preliminary ruling from the Tribunal Superior de Justicia de Cataluña (High Court of Justice, Catalonia, Spain))
( References for a preliminary ruling – Tax law – Value added tax – Directive 2006/112/EC – Article 132(1)(f) – Exemption for ‘cost-sharing groups’ – Exemption for services which may not be essential but are useful for the exempt activity of the members – Services for the direct purpose of carrying out tax-exempt activities – Existence of a distortion of competition by the grant of a tax exemption provided for by European Union law )
I. Introduction
1. The two requests for a preliminary ruling in the present case concern the exemption from VAT of ‘cost-sharing groups’, which has already been the subject of the Court of Justice’s case-law on several occasions. (2) That provision exempts services rendered by a group to its members if the group merely passes on the exact costs of those services to its members. However, the tax exemption is subject to the proviso that ‘such exemption is not likely to cause distortion of competition’.
2. The Court of Justice had to deal with this rather vague (negative) criterion for the first time in 2001 in Taksatorringen. (3) However, the question posed there was not precise enough and the answer given was so vague (the exemption should be refused ‘if there is a genuine risk that the exemption may by itself, immediately or in the future, give rise to distortions of competition’) that it was followed by many other requests for preliminary rulings. However, those were resolved without defining that criterion in more detail. It is therefore still unclear today when such distortions of competition can actually be assumed to exist as a result of a tax exemption provided for in European Union law itself, so that the exemption must ultimately be denied.
3. It is therefore unsurprising that the present requests for a preliminary ruling – there are simultaneous proceedings pending before the General Court on this issue under Case T‑558/24, which are currently suspended (4) – are ultimately asking the Court of Justice for a somewhat more practical interpretation.
II. Legal framework
A. European Union law
4. Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’) provides the legal framework under EU law. (5)
5. Article 131 of the VAT Directive lays down general provisions governing tax exemptions:
‘The exemptions provided for in Chapters 2 to 9 shall apply without prejudice to other Community provisions and in accordance with conditions which the Member States shall lay down for the purposes of ensuring the correct and straightforward application of those exemptions and of preventing any possible evasion, avoidance or abuse.’
6. Pursuant to Article 132(1)(f) of the VAT Directive in Chapter 2 concerning exemptions for certain activities in the public interest, Member States shall exempt the following transactions:
‘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’.
7. Article 134 of the VAT Directive excludes some transactions from certain exemptions under EU law under certain circumstances:
‘The supply of goods or services shall not be granted exemption, as provided for in points (b), (g), (h), (i), (l), (m) and (n) of Article 132(1), in the following cases:
(a) where the supply is not essential to the transactions exempted;
(b) where the basic purpose of the supply is to obtain additional income for the body in question through transactions which are in direct competition with those of commercial enterprises subject to VAT.’
B. Spanish law
8. Article 20(1)(6) of the Law on VAT 37/1992 transposes Article 132(1)(f) of the VAT Directive and provides, in so far as relevant here, as follows:
‘The following shall be exempt from tax:
6. Services rendered directly to their members by associations, groupings or autonomous entities, including Economic Interest Groupings, established exclusively by persons largely carrying on activities exempt from or not subject to tax, provided the following conditions are met:
(a) such services are used directly and exclusively in the course of that activity and are necessary in order to carry it out.
(b) the members are limited to reimbursing their share of the joint expenses.
…
The exemption does not extend to services provided by trading companies.’
III. Facts
9. The applicant in Case C‑379/24 (‘applicant 1’) was established on 11 February 2017 as an Agrupación de Interés Económico (A.I.E., Economic Interest Grouping). The aim was to create shared infrastructure for the members with regard to the provision of comprehensive cleaning services in hospitals, centres and buildings in general which are used by members to carry out their healthcare and health and social care activities.
10. The applicant in Case C‑380/24 (‘applicant 2’) was established on 15 July 2010 as a Sociedad Cooperativa Catalana Limitada (SCCL, Limited Catalan Cooperative Society). The aim was to create shared infrastructure for its members with regard to the provision of comprehensive cleaning services in the establishments and facilities in which its members carry out their educational activities (nursery, primary education, compulsory secondary education, further secondary education and vocational training).
11. Both applicants concluded a contract with a (different) third party for the administration and HR management of the staff employed by the two applicants. On the basis of the contracts, those third parties assigned the staff to the facilities and tasks, selected staff, prepared payslips, handled any incidents (including managing and terminating employment relationships), ensured that sufficient training was given to meet legal requirements and provided materials. Both contracts justify the subcontracting of that activity to the third parties with the fact that they have the experience, knowledge and resources required to conduct the management of the cleaning services which the two applicants provide to its members.
12. On 11 November 2013, a VAT audit of the second applicant was commenced for the periods January 2010 to December 2012, and on 2 June 2017 an audit of the fist applicant was commenced for the periods March 2013 to December 2014. Both audits concluded with the assessment of VAT for the transactions carried out by the applicants for the provision of cleaning services for their members. The arguments put forward are that the tax exemption provided for in Article 20(1)(6) of the Law on VAT does not apply because the applicants did not provide those services directly but used an external undertaking which actually provides a substantial part of the services. Furthermore, the cleaning services are not linked, directly and exclusively, to the tax-exempt activity and, therefore, the application of the tax exemption could lead to a distortion of competition.
13. The tax authorities have confirmed both decisions. In response to those decisions, each of the applicants brought an action before the referring court. They argue that the exemption cannot be denied due to the fact that the management of the staff has been outsourced to a third company as this circumstance is in line with the spirit and purpose of the tax exemption.
IV. Requests for a preliminary ruling
14. The Tribunal Superior de Justicia de Cataluña (High Court of Justice, Catalonia, Spain), which has jurisdiction over both actions, stayed both proceedings and referred the following questions to the Court of Justice for a preliminary ruling under Article 267 TFEU:
‘(1) Is it contrary to the spirit and purpose of the tax exemption in Article 132(1)(f) of the VAT Directive for a national provision to impose a requirement that the services in question be used directly and exclusively for the tax-exempt activity if that requirement is interpreted as meaning that a service (cleaning in the healthcare sector (C-379/24) or in the education sector (C-380/24)) is not used exclusively for the tax-exempt activity, even though it is unique, technical and complex in its organisation and design (in Case C‑380/24: regular cleaning and disinfection of facilities where minors are present and cared for for a prolonged period of time) as well as absolutely necessary?
(2) Is an interpretation of national law which rejects the tax exemption in accordance with the limits laid down by EU law contrary to the spirit and purpose of the tax exemption in Article 132(1)(f) of the VAT Directive because non-exclusivity in the provision of the service is equated with causing distortion of competition, thereby combining national and EU limits of the tax exemption? Please clarify whether the limit of ‘not distorting competition’ implies refusing the tax exemption, if it is not disputed by the parties, whatever the extent of its effect may be (Case C‑8/01, paragraph 48), on the basis that any exemption is an infringement of the general principle – acknowledged by the Court of Justice – of liability to tax?’
15. By order of 10 July 2024, the Court of Justice joined the two cases for a joint decision. Only the Spanish Government and the European Commission submitted written observations in the present proceedings. In accordance with Article 76(2) of the Rules of Procedure of the Court of Justice, the Court of Justice did not consider it necessary to hold a hearing.
V. Legal assessment
A. Background to the questions referred
16. The background to the questions referred is the decision by the EU legislature not to grant an input tax deduction in principle to undertakings which make exempt supplies, such as hospitals or children’s education facilities. It does not follow from the requests for a preliminary ruling that the members of the applicants only carry out exempt transactions in accordance with Article 132(1) of the VAT Directive. But neither does it follow from the requests for a preliminary ruling that the applicants carry out other taxable or other exempt transactions. If the cleaning services were to be categorised as such, a tax exemption under Article 132(1)(f) of the VAT Directive would not be possible per se.
17. The Opinion is therefore based on the assumption that both applicants carry out 100% exempt transactions under Article 132(1) of the VAT Directive. In such a situation, the services the applicants provide are not taxed, while at the same time the services they receive remain subject to VAT due to the lack of deduction of input VAT.
18. The consequence is that those exemptions (in particular the exemptions for social reasons listed in Article 132 of the VAT Directive) are only partial tax exemptions. Given that the non-deductible VAT from the services subject to input VAT usually is (must be) taken into account in the price calculation of the services subject to output VAT, the consumer indirectly bears the VAT burden. As a result, only the added value created by the supplier itself at the final stage (for example, in the case of hospital services, its own services to the patient) is exempt from VAT.
19. The consequence of the lack of deduction of input VAT by those undertakings is that, for example, cleaning services provided by the staff of a hospital only leads to a financial burden in terms of staff costs. However, the involvement of an external cleaning service provider leads to a financial burden at least in terms of its staff costs plus VAT.
20. Consequently, there is generally an economic interest for undertakings in tax-exempt sectors (such as hospitals) to provide those services themselves (so-called internalisation) and not to purchase them from another undertaking subject to tax. However, tax-exempt undertakings may find themselves in situations in which it is not economically viable to hire the staff internally. For example, it may make sense for several hospitals to share staff costs of a data processing centre or – as is the case here – those of cleaning staff.
21. For situations of that kind, Article 132(1)(f) of the VAT Directive exempts supplies by the group to its members provided certain conditions are met. In that case the exclusion of the input tax deduction does not have an impact on price, which means that the tax exemption for the final consumer continues to apply in full. That is because the tax exemption is independent of whether the input service was provided in its entirety by a tax-exempt undertaking itself (by its own staff) or together with other tax-exempt undertakings as part of a group (by the staff ‘shared’ by the group).
22. That is exactly what happened in the present case. Several undertakings which provide tax-free medical treatment or tax-free educational services have joined forces and share the costs of the group’s cleaning staff. However, they have outsourced the management of the staff to a third party. The fact that those paid services provided by the third party are taxable and that the VAT to be paid therefore represents a financial burden to be borne by the applicants appears to be undisputed and is not at issue in the legal action.
23. It is therefore only necessary to clarify whether the cleaning services provided by the applicants to their members (shareholders) in return for reimbursement of costs – that is to say the shared costs of the cleaning staff (6) – are also subject to VAT. That depends on whether the cleaning services were provided ‘for the direct purpose of carrying out’ the exempted medical treatment or educational services and were therefore necessary for that purpose (see B. below) and whether the exemption of the cleaning services provided to the members leads to a distortion of competition (see C. below). On that point, the questions referred can be answered together.
B. Services provided by the group for the direct purposes of the members’ tax-exempt activities
24. According to Article 132(1)(f) of the VAT Directive, services provided by the group to its members ‘for the direct purpose of carrying out those (note: namely VAT-exempt) activities’ (here, medical and educational services) are exempt. In my view, ‘direct necessity’ in other language versions (7) means the same thing. The VAT Directive ultimately requires a certain link between the service provided by the group and the exempt activity of the members. However, the wording does not require a direct link with a specific tax-exempt transaction of the member; it is sufficient that the supply of the group is necessary for the privileged tax-exempt activities of the member.
25. That also makes sense as the tax-exemption provision is aimed at reducing the input tax burden on the input side if several companies with certain tax-exempt activities form a group and only provide services to their members in return for the reimbursement of expenses. That is because VAT is always charged on input transactions if the input services are linked to the tax-exempt activity, irrespective of whether they are directly linked to a specific tax-exempt transaction.
26. A comparison with the wording of Article 134 of the VAT Directive also shows that – contrary to the arguments put forward by the Commission and Spain – those services do not have to be indispensable for the tax-free transactions. Article 134 of the VAT Directive excludes certain exemptions provided for in Article 132 of the VAT Directive if they are not essential to the transactions exempted. Here, the Council expressly refers to a link to certain transactions (and not just to a tax-exempt activity). Furthermore, that exclusion only applies to the ‘exemption, as provided for in points (b), (g), (h), (i), (l), (m) and (n) of Article 132(1)’. No reference is made to the tax exemption in Article 132(1)(f) of the VAT Directive, however.
27. It follows, a contrario, that services provided by the group to its members for the direct purpose of carrying out the members’ exempt activities must be read differently, that is to say more broadly. The services of the group need not therefore be indispensable for the tax-exempt activity, let alone for the tax-exempt transactions. Rather, the criterion of ‘directness’ in Article 132(1)(f) of the VAT Directive refers to the attribution of the group’s service to the VAT-exempt activity as opposed to a parallel taxable activity of the member (or tax-exempt activity not covered by Article 132 of the VAT Directive).
28. As the Court of Justice has already clarified, a partially taxable activity of the members does not rule out the tax exemption of the services of the group as such, (8) but only to the extent that those services are provided for the purposes of the taxable activity of the members. That is because those services, which contribute to the performance of other activities, are not covered by the scope of the exemption. (9)
29. However, such direct attribution for the purpose of carrying out a tax-exempt activity always exists if the member exclusively carries out tax-exempt transactions that are listed in the catalogue of Article 132(1) of the VAT Directive. That then also explains the counter-exemption in the event of a distortion of competition (see point 36 et seq. below). A counter-exemption would be largely superfluous if only those activities of the group were exempt which are necessarily linked to the exempt activity (in the sense of a conditio sine qua non).
30. To the extent that, in its statement, the Commission (and possibly also Spain) wishes to distinguish between general services, which are necessary for the majority of all transactions (for example, cleaning services, supervising services, IT services, etc.), and services specifically required for the tax exemption, that argument is unconvincing. The Commission even goes so far as to suggest that it can refer to the judgment in Taksatorringen (10) as a useful example. The case concerned the sharing of costs for an expert among the members of a group of insurance companies. It was argued that the service in question (assessment of damage) was sufficiently closely linked to tax-exempt insurance services; however, the same was not true for general cleaning services.
31. The argument is unconvincing for two reasons. On the one hand, insurances do not come within the scope of Article 132(1)(f) of the VAT Directive at all, a fact which at the time (in 2003) escaped the notice of the Commission, the referring court and the Court of Justice – which, in fairness, had not been asked about that point. The Court of Justice went on to clarify that point in 2017. (11) On the other hand, such costs are arguably even less specifically linked to tax-free insurance services than cleaning services in the medical and education sectors as in the present case. It is precisely the latter sectors that have special hygiene requirements for operators, which results in the particular need for certain cleaning services. The Court of Justice itself also only requires that the services directly contribute (12) to activities in the public interest under Article 132 of the directive. It can hardly be denied that cleaning services in a hospital contribute directly to tax-exempt hospital services.
32. By contrast, to my knowledge there are no general requirements on how damage to a motor vehicle is to be assessed. The amount of actual damage also has no impact on the tax-exempt service (insurance cover in return for payment of insurance premiums), but only concerns the amount that the insurance company ultimately has to pay out. The insurance cover provided in return for payment – that is to say, the tax-exempt service – is only affected in terms of the amount. Therefore, the Commission’s approach of distinguishing between general services that are useful for all transactions (such as cleaning services) and specific, directly necessary services (assessment of damage to be compensated) is not convincing.
33. That approach also contradicts the spirit and purpose of the provision to reduce the effects of the exclusion of the input VAT deduction (see point 18 et seq. above) if the service is not provided by a company’s own staff but by a group to its members.
34. If one takes that spirit and purpose seriously, then all services provided by the group to its members fall under the tax exemption if they are used by the members as services subject to input VAT in the context of their tax-exempt activity and are therefore directly attributable to the tax-free activity covered by Article 132 of the VAT Directive because they are common and necessary for that activity.
35. That seems to me to be the case for general cleaning services, which are more than common and also necessary in the medical treatment sector as well as in the education sector. In fact, according to the referring court, they are unique, technical and complex in their organisation and design and absolutely necessary. They therefore fall squarely within the scope of Article 132(1)(f) of the VAT Directive. Such services, which are normally associated with the tax-exempt activity so that a competitor of a certain size would provide them himself or herself and which are attributable to the taxable person’s tax-exempt activity covered by Article 132, therefore fall within the scope of Article 132(1)(f) of the VAT Directive.
C. Interpretation of the criterion of an absence of ‘distortion of competition’
1. Objective of the provision
36. If cleaning services generally fall within the scope of the tax exemption, it must be decided whether and when the tax exemption of such services is excluded as that would otherwise lead to a distortion of competition.
37. As the Court has already ruled (13) and I have stated elsewhere, (14) Article 132(1)(f) of the VAT Directive is intended to offset the competitive disadvantage of smaller undertakings compared to a larger competitor. That is because the latter can purchase the services supplied by the group either through its own employees or as part of a VAT group (Article 11 of the VAT Directive) through a closely related company. Article 132(1)(f) of the VAT Directive is intended to ensure equal VAT treatment of large and small undertakings, the need for which stems from the exclusion of the deduction for exempt outputs.
38. A small hospital without its own cleaning staff must bear higher costs than a larger competitor in order to be able to offer the same services. That is a competitive disadvantage stemming primarily from the size of the undertaking. Article 132(1)(f) of the VAT Directive makes it possible, however, to avoid that competitive disadvantage. The above-mentioned hospital can form a group with another hospital. That group hires the staff to provide the necessary cleaning services for both hospitals. The relevant costs are split between the two. Because the service supplied by the group to its members is exempt, VAT is now not charged on staff costs (the VAT charge on input remains the same for material costs as well as for costs for administrative services provided by a third party). The competitive disadvantage suffered by the two smaller hospitals compared with the (larger) competitor would thus be eliminated.
39. If, however, that exemption is intended to eliminate a competitive disadvantage, the grant of it as such cannot normally at the same time give rise to distortion of competition or create the risk of distortion of competition. The competition clause contained in Article 132(1)(f) of the VAT Directive seems somewhat unusual in this regard and makes little sense. (15)
2. Requirement of a strict interpretation of the distortion of competition criterion
40. For that reason, it would seem that a strict interpretation must be adopted if the tax-exemption provision in Article 132(1)(f) of the VAT Directive is not to be redundant. The same conclusion is reached if the absence of distortion of competition is understood as an exception to the exemption provided for, in principle, in Article 132(1)(f) of the VAT Directive since, according to the Court of Justice, any exception to or derogation from a general rule is to be interpreted strictly. (16)
41. If, however, the absence of distortion of competition is regarded as an exception to the exemption, which is in turn regarded as an exception to the general principle that VAT is to be levied, (17) a counter-exception could also be taken to exist. Such a counter-exception could be interpreted either very strictly (as an exception, which is to be interpreted strictly, to an exception) or very broadly (as a counter-exception to an exception which is to be interpreted strictly).
42. The correct approach is to interpret such ‘counter-exception’ neither strictly nor broadly, but teleologically, that is to say in accordance with its spirit and purpose. According to the case-law of the Court of Justice, the interpretation must be consistent with the objectives pursued by those exemptions and comply with the requirements of fiscal neutrality. In particular, the terms used to specify the exemptions referred to in Article 132 may not be construed in such a way as to deprive the exemptions of their intended effect. (18)
43. However, a broad interpretation prevents the spirit and purpose of the tax exemption (prevention of distortion of competition due to different options of internalisation) from being achieved. Compensation for a competitive disadvantage always inevitably has competition-related effects, which in turn cannot be regarded as a ‘harmful’ distortion of competition. In essence, that is consistent with the abovementioned (point 40) teleological, strict interpretation of the criterion of an absence of ‘distortion of competition’.
44. A starting point for such a strict interpretation is offered by the case-law of the Court of Justice to the effect that a finding of a distortion of competition requires there to be a genuine risk that the exemption may by itself, immediately or in the future, give rise to distortions of competition. (19) In that case the distortion of competition relates to the fact that the provision of services by a group is exempt. (20)
45. In the light of the necessary strict interpretation of the criterion of an absence of distortion of competition, such a distortion cannot then be established solely on the basis of the existence of such a market. That would make a mockery of the idea behind Article 132(1)(f) of the VAT Directive. That provision is intended to give market participants an option to prevent a competitive disadvantage in relation to larger competitors (see point 36 above), that is to say within an existing market, by cooperating with other (usually smaller) market participants.
46. In the view of the Court of Justice, when determining the existence of distortion of competition it must be examined whether the group can be certain of keeping its members’ customers even if there is no exemption. (21) If the services supplied by the group are tailored to the needs of the members such that the group can also be certain that the members will purchase those services, there is, in principle, organised joint action (see above, point 36 et seq.), which is intended to be exempt under Article 132(1)(f) of the VAT Directive. In other words, the existence of such a group rules out any distortion of competition in principle, since the purpose of such a form of organisation is generally to ensure that the members also purchase the services.
47. Members of a cost-sharing group usually only ever come together if they are certain that those members will also purchase the group’s services (‘purchasing guarantee’). It can thus be assumed in principle that the formation of a group for the supply of its members will not cause a distortion of competition within the meaning of Article 132(1)(f) of the VAT Directive.
48. If one were to take seriously the idea of organisational neutrality – which Advocate General Rantos (22) rightly emphasised in connection with Article 11 of the VAT Directive – then all services are covered which are normally provided in connection with the tax-exempt activities listed in Article 132(1) of the VAT Directive (here the tax-exempt medical treatment services and the tax-exempt educational services) and which can be carried out internally without great effort, so that large companies would normally carry them out themselves. In such a case, the tax exemption under Article 132(1)(f) of the VAT Directive merely eliminates the advantage of large undertakings and cannot, in itself, constitute a distortion of competition. Cleaning services, which are necessary not least for sanitary reasons in both the medical treatment sector and the education sector and are therefore common therein, cannot therefore give rise to a risk of distortion of competition in a cost-sharing group.
49. In view of the purpose of the exemption (preventing a competitive disadvantage), the criterion requiring that there should be no distortion of competition can therefore, in my view, serve solely to avoid abuse (see Article 131 of the VAT Directive). Ultimately it simply serves to ensure that the exemption is not applied inappropriately. In my view, when that is the case can be ascertained only on the basis of indications.
3. Indications of an improper application
50. An indication that the tax exemption provided for in Article 132(1)(f) of the VAT Directive is being applied inappropriately may be, for example, that the group supplies the same services to a significant extent for consideration to non-members and is to that extent, by exploiting effects of synergy, operating on the market primarily as a competitor and less as a cooperative group. That could, under certain circumstances, constitute a correspondingly genuine risk of distortion of competition in relation to the abovementioned third-party suppliers. That does not appear to be the case here.
51. Yet another indication may be that the group does not supply any services tailored to the specific needs of its members, but only sells on the purchased services. Those services could just as easily be offered and received by others. Here, too, third-party suppliers might be forced from the market in question. In the present case, however, the group provides its own cleaning services as these are not merely purchased but are provided by the group’s staff. The fact that a third party is engaged to provide HR management services does not affect the finding as the appropriate VAT is paid to the third party for that service.
52. Another indication may be that the primary purpose of the group’s formation is simply to optimise the input VAT burden rather than to establish reciprocal cooperation with a view to avoiding a competitive disadvantage. An optimisation of the input VAT burden can be taken to exist where a competitive advantage is created by switching any necessary peripheral services received to a group in a state with a very low VAT rate or no VAT (assuming that the tax exemption under Article 132(1)(f) of the VAT Directive were also to apply across borders (23)). This can probably also be ruled out in the present case.
VI. Conclusion
53. I therefore propose that the Court of Justice respond as follows to the questions referred by the Tribunal Superior de Justicia de Cataluña (High Court of Justice, Catalonia, Spain):
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 as meaning that the exemption of services provided by a group to its members in return for the exact reimbursement of their share of the expenses concerns services subject to input VAT used by the members in the context of their tax-exempt activity and which are typically obtained for the provision of the exempt activity because they are necessary for that provision. The exemption of those services does not, in principle, lead to a distortion of competition if the services in question are normally provided as part of the tax-exempt activity, which a large company would usually provide itself. The situation may be different if the exemption is applied inappropriately.