VAT Groups: Potential VAT Costs for Financial Groups as ECJ Recognises Intra-Entity Supplies between US Head Office and VAT-Grouped Branch

Sullivan & Cromwell LLP - 10 October 2014

The European Court of Justice has decided that IT services provided by Skandia America Corporation to its Swedish branch should be recognised for VAT purposes because the Swedish branch was part of a VAT group.

It is not clear how widely the principle underlying the decision extends and how EU member states will implement it.  On the widest interpretation, it would apply to situations involving

  • non-EU companies with EU branches,
  • EU companies with non-EU branches and
  • companies in one EU member state with branches in another,
and apply irrespective of the grouping rules of the member state or states concerned.

Where it applies, it will affect international groups that do not fully recover VAT on their costs, most obviously banks and insurers.

Some of the effects of the decision may be mitigated by altering VAT group membership or restructuring the group’s operations.