Germany - Update on jurisprudence relating to VAT grouping rules

Germany’s Federal Finance Court (BFH) recently published two decisions on the domestic VAT grouping rules. The decisions follow rulings issued by the Court of Justice of the European Union (CJEU) on 1 December 2022 on the conditions to set up a VAT group and the rights and obligations of the group (Cases C-141/20 and C-269/20).

The two cases had been referred to the CJEU to decide whether measures in Germany’s VAT law are compatible with EU law. One German provision at issue was the rule under which the controlling company in a VAT group—rather than the group itself—is the taxable person for the group. Commentators had expressed concerns that this provision may not withstand scrutiny by the CJEU. However, the CJEU concluded that this rule is in line with EU law, but the court took the position that other features of the German VAT grouping rules are not.

The VAT grouping rules—as set out in the EU VAT directive—allow independent entities that normally would be subject to VAT on a standalone basis but that meet certain requirements to be considered a single taxable person for VAT purposes. Where a VAT group exists, all transactions carried out by individual group members are deemed to be carried out by the group as a single taxpayer, transactions within the group generally are disregarded and outside the scope of VAT, the group has its own VAT ID number and only one VAT return has to be filed on behalf of the group. However, group members remain jointly and severally liable for any VAT debts. One of the requirements to operate as a VAT group is that the entities must be linked financially, organisationally and economically to the parent company. As noted above, the German rules are different in that the controlling company in the group is considered the sole taxable person for VAT purposes.

The most important aspects of the BHF decisions, which implement the CJEU rulings, are as follows:

  • Controlling company: The German approach that the controlling company is the taxable person in a VAT group is compatible with EU law. The CJEU stated in its decision that the language in the VAT directive allows each member state to regard a number of entities as a single VAT-taxable person if they are established in the territory of that member state and if, although they are legally independent, the entities meet the financial, economic and organisational linking requirements. There are no other requirements in the VAT directive—specifically, with respect to who the group representative is, nor does the directive provide that member states can impose other conditions on economic operators to establish a VAT group. Member states have discretion to include restrictions on the formation of a VAT group as long as the restrictions are within the objectives of the VAT directive to prevent abusive practices and/or to combat tax avoidance or evasion, etc. The CJEU concluded that the controlling company of the VAT group could be selected as a single taxable person if that company is in a position to impose its will on the other group entities.
  • Financial integration: The BFH previously required the controlling company in the group to hold both a majority shareholding in the controlled companies and a majority of the voting rights to meet the financial integration requirement. However, the CJEU held that the financial integration requirement in the VAT directive should not be interpreted narrowly, and that requirement does not mean that VAT grouping applies only to entities that are in a subordinated relationship with the controlling company in the group. According to the CJEU, Germany’s policy to require both a majority shareholding and voting rights is too strict and goes beyond what would be needed to prevent abuse and tax avoidance/evasion. The BFH has now decided that financial integration exists where the controlling company has a majority shareholding in the group companies carrying 50% of the voting rights and where the managing bodies of the two companies are identical. In this scenario, the fact that the controlling company holds the majority of the shares in connection with the 50% voting rights and that there are identical managing bodies effectively makes it possible for the controlling company to impose its will on the subsidiary, which is decisive for meeting the financial integration requirement.
  • VAT ID: As the CJEU concluded that there is only one VAT ID number per taxable person, the German practice that each member of the VAT group must have its own ID will have to be revised.
  • Intragroup transactions: Another issue before the CJEU was whether intragroup transactions fall within the scope of VAT. Under Germany’s VAT grouping rules, group members are deemed to be part of the controlling company’s business rather than independent businesses (even though they continue to carry out their economic activities), with the result that transactions between group members are considered intragroup supplies not subject to VAT, even if those transactions are carried out for consideration. The BFH has referred the question whether this practice is in line with the VAT directive back to the CJEU, because the CJEU’s decision could create the impression that intragroup transactions should not be treated as falling outside the scope of VAT. If the CJEU ultimately concludes that intragroup transactions should be subject to VAT, the existing rules for a (German) VAT group would be turned upside down.


While the CJEU’s position on the role of the controlling entity within a German VAT group is welcome, German policy will need to be changed with respect to the VAT ID number. Due to the changes in jurisprudence, German VAT groups should review their status, especially if there are other members to be included in the VAT group based on the BFH’s revised interpretations.

Annette Pogodda-Grünwald
Daniel Auer
Frank von Itter
BDO in Germany