ECJ ruling and the treatment of VAT

Could the VAT treatment of financial services be significantly widened? The Court of Justice of the European Union (ECJ) has issued a ruling on Skandia America Corporation that will have a wider impact within the European Union.

In its simplest interpretations, this case has the potential of widening the VAT treatment of financial services, therefore the most affected sector being banks and insurers.

Skandia America Corporation (USA) (SAC) was the global IT purchasing company for the whole Skandia Group from third-party suppliers. The externally purchased IT services were then distributed to various entities within the group including its Swedish branch.

SAC operated in Sweden through its branch, filial Sverige (Skandia Sverige) which was VAT registered.

The Swedish branch was responsible for IT production, ie they produced a final IT product which was then supplied to other companies within the Skandia Group at a mark-up of 5%. Some of the entities supplied were within the VAT group.

Costs were then allocated between SAC and Skandia Sverige via internal invoices.

This is where the issues with the Swedish tax authorities began. The authority decided to charge VAT on the supplies from SAC to Skandia Sverige on the basis that they were a taxable supply and made by SAC.

This meant that Skandia Sverige was also liable for VAT and it was charged the tax as it was the branch of SAC.

This is the point when Skandia Sverige took action against the authorities before being referred to court, at which point the Stockholm Administrative court referred the question to the ECJ for a preliminary ruling.

The question referred was whether:

  1. articles 2(1), 9 and 11 of Council Directive (EC) 2006/112 had to be interpreted as meaning that supplies of services from a main establishment in a third country to its branch in a member state constituted taxable transactions when the branch belonged to a VAT group; and
  2. articles 56, 193 and 196 of the VAT Directive had to be interpreted as meaning that, in a situation such as that in the main proceedings where the main establishment of a company in a third country supplied services for consideration to a branch of that company in a member state and where that branch belonged to a VAT group in that member state, that VAT group, as the purchaser of the services, became liable for the VAT payable.

The third country is a reference to outside the EU.

How did the ECJ rule, article 9, look at the definition of a ‘taxable person’, which is any person carrying out any economic activity ‘independently’?

A supply of services is taxable only if a service supplier exists and has a legal relationship with the recipient, and there is a reciprocal performance.  

It is therefore important to see if there is a legal relationship between a non-resident company and one of its branches in an EU member state, thus making the supplies subject to VAT.

It is also therefore necessary to see if a branch operates independently, to see if it bears the brunt of the economic business risks.

It was concluded on this point that the supplies of services from a main establishment to its branch in a member state constituted a taxable transaction where the branch belongs to a VAT group.

On the second question, VAT was payable to whom the services were supplied where the services were supplied by a taxable person who was not established in that member state.

In other words, where the main establishment is outside the EU and supplied these services to its branch for a consideration which is based in a member state and belongs to VAT group in that member state, the branch becomes liable for that VAT as the purchaser.

This is effectively expanding the VAT net for the banking and insurance sector to the internally shared costs between branches.


As different member states will make their own interpretation of the decision this will likely lead to some uncertainty for this sector. 

In addition, due to the UK’s position in the sector most affected by this decision, there will be a major impact on UK banks and insurers.

Added to that, this effectively reverses the advocate general's previous decision, so watch this space for what HMRC’s take will be.

See the court judgement on the Curia website