CJEU rules on taxability of intracompany supplies of cross-border services between affiliated companies

The CJEU has ruled on the applicability of the reverse charge for intracompany cross-border supplies of services to a fixed establishment belonging to a VAT group in an EU member state.

The Court of Justice of the European Union (CJEU) issued a decision on 17 September 2014 about the VAT treatment of charges made between a head office and its foreign branch that was included in a domestic VAT group.

So far cross-border supplies of services between the head quarter and its foreign fixed establishment are considered as non-taxable internal supplies.

The CJEU now restricted this principle and held in Skandia America Corporation USA that where a foreign branch of an entity is part of a another VAT group, any supplies of services made by the head office to that branch are considered to be made to the foreign VAT group as a whole, and hence subject to VAT. It is then the responsibility of the VAT group to account for VAT on these supplies under the reverse charge provisions.

According to the CJEU, a service rendered between the headquarter and its foreign fixed establishment that is a part of another VAT group in another country should no longer be considered a nontaxable internal supply. This may lead to VAT impacts, particularly if the recipient is not fully entitled to deduct input VAT.

In the light of the CJEU decision, companies having a permanent establishment and group companies abroad should verify whether there may be a supply of services to a VAT group.