Skandia America Corp. (USA), filial Sverige v Skatteverket (C7/13)
This Court of Justice of the European Union case reviewed concerned a VAT group in Sweden where one of the group members (the Swedish branch of a US company) was supplied by its US head office with externally purchased IT services. The taxpayer company argued that the supply took place within the same company and was not therefore within the scope of the tax; the Swedish tax authority argued that VAT was due under the reverse charge provisions, on the grounds that the US head office was not part of the group. The Court found that VAT was indeed due, but on a subtly different basis – the Court ruled that the VAT group was a separate taxable person from any of its member companies, so that the services could not be regarded as supplied within the same company. It is this aspect of the decision that has implications for the UK and other member states.
Analysts of the case are of the view that this decision could have a significant bearing on the financial services sector and raises the possibility of Irish VAT arising on charges from a foreign head office to its Irish branch. The judgment is also relevant to the UK, and other EU Members States.
Chartered Accountants Ireland will be engaging with Revenue on the implications of the Skandia judgement at the TALC forum. HMRC have recently published Revenue and Customs Brief 37/14 confirming the current UK position. HMRC are carefully considering the judgment and will provide a further update in due course. Readers will be kept abreast of developments in tax.point.
Relevant legislation and key facts
The case constituted a request for a preliminary ruling relating to the interpretation of Articles 2, 9(1), 11, 56, 193 and 196 of Council Directive 2006/112/EC on the common system of value added tax (‘the VAT Directive’). The relevant legislative provisions are laid out below.
The request was made in proceedings between Skandia America Corp. (“Skandia USA”), filial Sverige (“Skandia Sverige”), and the Swedish tax authorities regarding the latter’s decision to charge VAT on the supply of services by Skandia USA, established in the United States, to its branch Skandia Sverige.
Relevant legislation
Directive 2006/112
Article 2(1)(c) of the above Directive provides as follows:
“1. The following transactions shall be subject to VAT:
...
(c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such”.
The first subparagraph of Article 9(1) of the Directive stipulates:
“Taxable person” shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.”
Article 11 of the Directive provides as follows:
“After consulting the advisory committee on value added tax ..., each Member State may regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links.
A Member State exercising the option provided for in the first paragraph, may adopt any measures needed to prevent tax evasion or avoidance through the use of this provision.”
Points (c) and (k) of Article 56(1) of the VAT Directive provide as follows:
“The place of supply of the following services to customers established outside the Community, or to taxable persons established in the Community but not in the same country as the supplier, shall be the place where the customer has established his business or has a fixed establishment for which the service is supplied, or, in the absence of such a place, the place where he has his permanent address or usually resides:
...
(c) the services of consultants, engineers, consultancy bureaux, lawyers, accountants and other similar services, as well as data processing and the provision of information;
...
(k) electronically supplied services, such as those referred to in Annex II.”
Article 193 of the VAT Directive states as follows:
“VAT shall be payable by any taxable person carrying out a taxable supply of goods or services, except where it is payable by another person in the cases referred to in Articles 194 to 199 and Article 202.”
Article 196 of the VAT Directive provides as follows:
“VAT shall be payable by any taxable person to whom the services referred to in Article 56 are supplied or by any person identified for VAT purposes in the Member State in which the tax is due to whom the services referred to in Articles 44, 47, 50, 53, 54 and 55 are supplied, if the services are supplied by a taxable person not established in that Member State.”
Annex II to the VAT Directive, entitled ‘Indicative list of the electronically supplied services referred to in point (k) of Article 56(1)’, provides as follows:
- website supply, web-hosting, distance maintenance of programmes and equipment;
- supply of software and updating thereof;
- supply of images, text and information and making available of databases;
- supply of music, films and games, including games of chance and gambling games, and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events;
- supply of distance teaching.
On 2 July 2009, the European Commission adopted a communication explaining its position to the Council and the European Parliament on the VAT group option provided for in Article 11 of the Directive (COM(2009) 325 final).
Swedish law
The VAT Directive was transposed directly into Swedish law (the ‘Law on VAT’). Chapter 1 paragraph 1 of that Law seeks to transpose Article 2(1) of the VAT Directive by providing that VAT is payable to the State in respect of any supply of services within the country which is taxable and performed in the course of an economic activity.
Paragraph 2, first subparagraph, point (1), of that Chapter, whose purpose is to transpose Articles 193 and 196 of the VAT Directive, provides that anyone who carries out a supply of services within the meaning of Paragraph 1 of that Chapter is required to pay the VAT on that transaction unless the transaction is amongst those referred to in points (2) to (4) of the first subparagraph. It follows from point (2) of the first subparagraph that the purchaser of services covered by Chapter 5, Paragraph 7, of the Law on VAT, from a foreign undertaking, is required to pay VAT on the purchase.
Under Paragraph 15 of Chapter 1 of the Law on VAT, a foreign taxable person is an operator which does not have its seat of economic activity, or a fixed establishment, in Sweden and is not permanently resident or habitually resident in Sweden.
Chapter 5, Paragraph 7, first subparagraph, of that law, intended to transpose Article 56 of the VAT Directive. It provides that the services listed in the second subparagraph are deemed to be supplied within Sweden if they are supplied from a country outside the European Union and the purchaser is an economic operator which has its seat of economic activity in Sweden. The services covered in the second subparagraph of Paragraph 7 include, inter alia, consultancy services and similar services and electronically supplied services for the distance maintenance of programmes and for the supply and updating of software.
In relation to the concept of a group of persons considered to be a sole taxable person for VAT purposes (‘the VAT group’), the Kingdom of Sweden, exercising the option provided for in Article 11 of the VAT Directive, adopted Chapter 6a, Paragraphs 1 to 4, of the Law on VAT pursuant to which two or more economic operators may be regarded as a single operator, that is to say, a VAT group, and the activity in which they are engaged may be regarded as a single activity.
It follows from those provisions that only the fixed establishment, in Sweden, of an economic operator may belong to a VAT group, and such a group may consist only of economic operators which are closely bound to one another by financial, economic and organisational links.
Under the same provisions, a VAT group is created on the basis of a decision to register by the Swedish tax authority following an application from the members of the group concerned.
Key facts
In 2007 and 2008, Skandia USA was the global purchasing company for IT services for the Skandia group and carried out its activities in Sweden through its branch, Skandia Sverige. Skandia USA distributed externally-purchased IT services to various companies in the group and to Skandia Sverige which, since 2007, has been registered as a member of a VAT group.
Skandia Sverige was tasked with processing the externally-purchased IT services to produce the final product. That final product was then supplied to various companies in the Skandia group, both within and outside the VAT group. A mark-up of 5% was charged on each supply of services, both between Skandia USA and Skandia Sverige and between the latter and other companies in the Skandia group. Costs were allocated between Skandia USA and Skandia Sverige by the issue of internal invoices.
The Swedish tax authority decided to charge VAT on the supplies of IT services from Skandia USA to Skandia Sverige in the 2007 and 2008 financial years taking the view that those supplies constituted taxable transactions. It thus considered Skandia USA to be liable for VAT. Consequently, Skandia Sverige was identified as also liable for VAT and it was charged the amount of tax relating to those supplies on the ground that it was Skandia USA’s branch in Sweden.
Skandia Sverige disagreed and brought an action against those decisions before the referring court.
The Stockholm Administrative Court decided to stay proceedings and referred the following questions to the Court for a preliminary ruling:
- ‘Do supplies of externally purchased services from a company’s main establishment in a third country to its branch in a Member State, with an allocation of costs for the purchase to the branch, constitute taxable transactions if the branch belongs to a VAT group in the Member State?
- If the answer to the first question is in the affirmative, is the main establishment in the third country to be viewed as a taxable person not established in the Member State within the meaning of Article 196 of [the VAT Directive], with the result that the purchaser is to be taxed for the transactions?’
Decision
The first question
In relation to the first question, the referring court was asking, in essence, whether Articles 2(1), 9 and 11 of the VAT Directive must be interpreted as meaning that supplies of services from a main establishment in a third country to its branch in a Member State constitute taxable transactions when the branch belongs to a VAT group.
Article 2(1) of the VAT Directive states that, inter alia, the supply of services for consideration within the territory of a country by a taxable person acting as such is to be subject to VAT. Article 9 of the VAT Directive defines ‘taxable person’. This is any person who carries out any economic activity ‘independently’. It is especially important for the uniform application of the VAT Directive that the notion of ‘taxable person’, defined in Title III thereof, is given an autonomous and uniform interpretation.
According to the Court’s case-law, a supply of services is taxable only if there exists between the service supplier and the recipient a legal relationship in which there is a reciprocal performance. To establish whether such a legal relationship exists between a non-resident company and one of its branches established in a Member State so that the supplies made may be liable to VAT, it is necessary to determine whether that branch carries out an independent economic activity.
It is necessary to determine whether that branch may be regarded as being independent, in particular in that it bears the economic risk arising from its business (judgment in FCE Bank, EU:C:2006:196, paragraph 35).
As a branch of Skandia USA, Skandia Sverige does not operate independently and does not itself bear the economic risks arising from the exercise of its activity. In addition, as a branch, according to the national legislation, it does not have any capital of its own and its assets belong to Skandia USA. Consequently, Skandia Sverige is dependent on Skandia USA and cannot therefore itself be characterised as a taxable person within the meaning of Article 9 of the VAT Directive.
The existence of an agreement on the sharing of costs via the issue of internal invoices is irrelevant when such an agreement has not been negotiated between independent parties (FCE Bank, EU:C:2006:196, paragraph 40).
Skandia Sverige is a member of a VAT group, created on the basis of Article 11 of the VAT Directive and therefore forms with the other members a single taxable person. For VAT purposes, that VAT group was allocated a registration number by the competent national authority.
Treatment as a single taxable person precludes the members of the VAT group from continuing to submit VAT declarations separately and from continuing to be identified, within and outside their group, as individual taxable persons, since the single taxable person alone is authorised to submit such declarations. It follows that, in such a situation, the supplies of services made by a third party to a member of a VAT group must be considered, for VAT purposes, to have been made not to that member but to the actual VAT group to which that member belongs.
Therefore, for VAT purposes, the services supplied by a company such as Skandia USA to its branch which, such as Skandia Sverige, belongs to a VAT group, are considered not to be supplied to that branch but must be regarded as being supplied to the VAT group.
Therefore, it follows that services provided for consideration by a company such as Skandia USA to its branch must be deemed, solely from the point of view of VAT, to have been provided to the VAT group. As that company and branch cannot be considered to be a single taxable person, it must be concluded that the supply of such services constitutes a taxable transaction, under Article 2(1)(c) of the VAT Directive.
Therefore the answer to the first question is that Articles 2(1), 9 and 11 of the VAT Directive must be interpreted as meaning that supplies of services from a main establishment in a third country to its branch in a Member State constitute taxable transactions when the branch belongs to a VAT group.
The second question
By its second question, the referring court was asking, in essence, whether Articles 56, 193 and 196 of the VAT Directive must be interpreted as meaning that, in a situation where the main establishment of a company in a third country supplies services for consideration to a branch of that company in a Member State and where that branch belongs to a VAT group in that Member State, that VAT group, as the purchaser of the services, becomes liable for the VAT payable.
Article 196 of the VAT Directive provides that, as an exception to the general rule in Article 193 of that Directive, according to which VAT is payable in a Member State by a taxable person carrying out a taxable supply of services, VAT is payable by the taxable person to whom those services are supplied where the services referred to in Article 56 of that directive are supplied by a taxable person which is not established in that Member State.
Therefore, in accordance with paragraph 31 above, a supply of services such as that at issue in the main proceedings constitutes a taxable transaction, under Article 2(1)(c) of the VAT Directive, and that the VAT group to which the branch receiving those services belongs is deemed, for VAT purposes, to be the person to whom those services are supplied.
It is not disputed that the services supplied in the case in the main proceedings are among those mentioned in Article 56 of the VAT Directive. In those circumstances, and where it is also not disputed that the company which supplied those services is located in a third country and that it constitutes a separate taxable person from the VAT group, it is that group which, as the purchaser of the services for the purposes of Article 56 of that directive, is liable for the VAT pursuant to the exception in Article 196 of the VAT Directive.
Having regard to the foregoing considerations, the answer to the second question referred for a preliminary ruling is that Articles 56, 193 and 196 of the VAT Directive must be interpreted as meaning that, where the main establishment of a company in a third country supplies services for consideration to a branch of that company in a Member State and where the branch belongs to a VAT group in that Member State, that VAT group, as the purchaser of those services, becomes liable for the VAT payable.
The full judgement of the case is available from
