The Court of Justice of the European Union (CJEU) issued an important decision on 22 January 2026 regarding the application of the cost sharing exemption based on the EU VAT directive. The exemption allows independent groups (often structured in Spain as economic interest groupings or AIEs) to provide services to members exempt from VAT provided the services are directly necessary for the members' tax-exempt or nontaxable activities (e.g., activities in the public interest, such as health and education) and as long as it does not result in a distortion of competition. The CJEU confirmed that services do not need to be indispensable or exclusively linked to the exempt activity to qualify for the exemption provided they contribute directly to the exercise of that activity.
The case before the CJEU involved cost sharing groups (AIEs) established by hospitals and educational institutions in Spain. The groups set up a common structure to provide comprehensive cleaning services to their members and entered into arrangements with third parties in relation to staff management and operational support. The Spanish tax authorities denied the VAT cost sharing exemption, asserting that the exemption was unavailable because the services were not rendered directly by the groups nor were they used “exclusively” for the exempt activity and they could potentially distort competition.
Under Spain’s VAT law, services must be used “directly and exclusively” in the exempt activity. The tax authorities have interpreted this to mean that the cost sharing exemption does not encompass general services that lack a direct relationship with the exempt activity if the services are not sufficiently necessary for the performance of that activity, which effectively means that the services must be specific to the VAT-exempt activity to qualify for the exemption.
The CJEU rejected the Spanish tax authorities’ restrictive interpretation of the VAT cost sharing exemption, holding that:
The CJEU decision reinforces a more functional and pragmatic approach to determining whether services fall within the scope of the cost sharing exemption. Potentially affected taxpayers should review existing cost sharing arrangements to determine whether services previously considered taxable may now fall within the scope of the exemption.
It will be important to monitor how the Spanish tax authorities apply this criterion, as its implementation could materially reduce VAT costs for entities carrying out exempt activities, typically with limited input VAT recovery, by allowing certain services to fall within the cost sharing exemption and thus be supplied without irrecoverable VAT.
Alvaro Gomez-Elvira
BDO in Spain
Background
The case before the CJEU involved cost sharing groups (AIEs) established by hospitals and educational institutions in Spain. The groups set up a common structure to provide comprehensive cleaning services to their members and entered into arrangements with third parties in relation to staff management and operational support. The Spanish tax authorities denied the VAT cost sharing exemption, asserting that the exemption was unavailable because the services were not rendered directly by the groups nor were they used “exclusively” for the exempt activity and they could potentially distort competition.Under Spain’s VAT law, services must be used “directly and exclusively” in the exempt activity. The tax authorities have interpreted this to mean that the cost sharing exemption does not encompass general services that lack a direct relationship with the exempt activity if the services are not sufficiently necessary for the performance of that activity, which effectively means that the services must be specific to the VAT-exempt activity to qualify for the exemption.
CJEU Decision
The CJEU rejected the Spanish tax authorities’ restrictive interpretation of the VAT cost sharing exemption, holding that:
- The exemption can apply even when services are not essential to the exempt activity if they directly contribute to its performance.
- The exemption is not undermined simply because external service providers also supply services to other customers.
- It is contrary to EU law to treat the mere general nature of the independent group’s services—or their potential use in other activities (including taxable activities)—as sufficient to establish a distortion of competition or a risk of one.
- A narrow interpretation would compromise the effectiveness and purpose of the exemption.
BDO Perspective
The CJEU decision reinforces a more functional and pragmatic approach to determining whether services fall within the scope of the cost sharing exemption. Potentially affected taxpayers should review existing cost sharing arrangements to determine whether services previously considered taxable may now fall within the scope of the exemption.It will be important to monitor how the Spanish tax authorities apply this criterion, as its implementation could materially reduce VAT costs for entities carrying out exempt activities, typically with limited input VAT recovery, by allowing certain services to fall within the cost sharing exemption and thus be supplied without irrecoverable VAT.
Alvaro Gomez-Elvira
BDO in Spain