Foreign establishments to be excluded from Dutch VAT groups
In a decree published on 1 July 2022, the Dutch State Secretary for Finance announced changes to the policy on cross-border VAT groups and, in particular, the concept of a “fixed establishment” for VAT purposes. The decree takes into account jurisprudence of the Court of Justice of the European Union (CJEU) in the Skandia and Danske Bank cases and amends the VAT decree issued on 18 December 2020 (for prior coverage, see the article in the January 2021 issue of Indirect Tax News). Based on the new decree, as from 1 January 2024, it will no longer be possible to include foreign establishments in a Dutch VAT group, which will have significant consequences (particularly for the financial sector) for the VAT treatment of supplies between entities that are part of a Dutch group and that have foreign establishments.
A fixed establishment is an establishment of a business in a country other than the country where the principal business is located, with specific requirements to be met for a fixed establishment to exist. While the supply of goods and services between a fixed establishment and its head office generally fall outside the scope of VAT because the transaction takes place within the same legal entity, the Skandia and Danske Bank decisions clarify the VAT treatment of these supplies where either the head office or the fixed establishment is part of a VAT group in an EU member state. In Skandia, services were provided by a U.S. company (head office) to its Swedish branch that was part of a Swedish VAT group, and in Danske Bank, services were provided by a Danish head office that was part of a VAT group to its fixed establishment (branch) in Sweden (for prior coverage, see the article in the June 2021 issue of Indirect Tax News and the article in the December 2014 issue). The CJEU held in both cases that the transactions between the fixed establishment and the head office were subject to VAT because the services were deemed to be supplied to the VAT group, which is a separate taxable person for VAT purposes.
Under current Dutch practice, a Dutch VAT group may be formed by two or more VAT-registered persons established in the Netherlands or persons that have a fixed establishment in the Netherlands. Where a fixed establishment of a foreign company joins a Dutch VAT group, the foreign head office is automatically included in the group. Among the benefits of VAT grouping are that all supplies of goods and services within the group are disregarded for VAT purposes, so no VAT is calculated on intragroup transactions and a single VAT return can be filed on behalf of the group. As a result, cross-border supplies to or from a foreign establishment currently are outside the scope of VAT in the Netherlands.
The new decree will change this practice starting in 2024. The decree acknowledges that normally there is no commercial activity between a head office and its branch because they are part of the same entity. However, where either the head office or branch is part of a VAT group in an EU member state and the other establishment is located outside that member state, supplies of services are then subject to VAT. The decree then states that it follows from CJEU case law that a VAT group in a member state is “territorially limited” in scope, i.e., it can only include entrepreneurs established in that member state and a local branch of an entrepreneur established outside that member state.
Impact on Dutch practice
As a result of the State Secretary's change in course, a foreign head office and a foreign fixed establishment will no longer be able to be part of a Dutch VAT group as from 2024. The group and the foreign establishment will become separate taxable persons for VAT purposes, meaning that supplies between the Dutch VAT group and the foreign establishment will fall within the scope of VAT unless an exemption applies or the place of supply is outside the EU. This policy shift will have far-reaching consequences, such as a negative impact on businesses that are not entitled to fully deduct VAT, new reporting and compliance obligations and possibly necessitating changes to a business’ administration and ERP systems.
Affected businesses should begin now to identify how services are purchased and charged within the company and the VAT consequences of the change. It may be possible to modify the group structure to create more beneficial VAT treatment, for example, by having services purchased directly by the head office or purchased partly by the head office and partly by the fixed establishment.