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Freshfields Transactions

| 4 minutes read

German VAT group rules – do the recent decisions of the European tax court mark the end of non-VATable intra-group supplies?

The long-awaited judgements of the European Court of Justice (ECJ) on fundamental questions of the German rules for fiscal unities (i.e. VAT groups) were published on 1 December 2022. Both decisions (C-141/20 “Norddeutsche Gesellschaft für Diakonie” and C-269/20 “Finanzamt T vs. S”) deal with the question of whether the German understanding of the consequences of the existence of a VAT group are in line with EU law.

The answers of the ECJ do not surprise insofar as they again establish that the German interpretation of the prerequisites for a VAT group is too strict and is therefore in conflict with EU law. However, contrary to expectations, these ECJ decisions should not result in significant tax losses for the German budget as some had feared. Nonetheless, the decisions have the potential to change the current German understanding of the taxation of services supplied between the members of a VAT group, and this may lead to significant financial consequences for VAT groups making VAT exempt supplies (e.g. financial institutions and insurance companies).

Questions referred to the ECJ

The ECJ had – inter alia – to decide on the following questions referred it to by the German Federal Tax Court:

  1. Do the EU rules permit a Member State to designate a member of a VAT group (the controlling company) as the taxable person instead of the VAT group itself?
  2. Does the financial integration, as required under German law, to establish a VAT group constitute a permissible measure that is necessary and appropriate for attaining the envisaged objectives and is therefore not in conflict with EU law?
  3. Is a non-controlling member of a VAT group typically to be regarded as not being independent for VAT purposes?

Answers of the ECJ

1. Controlling company as taxpayer

The ECJ took the view that the current German rules comply with EU law in this respect. From the relevant rules it follows that Member States are permitted to treat persons who are independent from a legal point of view but interlinked by economic, financial or organisational ties not as separate taxpayers, but as one single taxpayer for VAT purposes. As a result, only this single taxpayer has to submit tax returns to and to represent the VAT group vis-à-vis the tax authorities. However, the relevant EU law neither specifies how to determine who the representative of the VAT group is nor in which way such representative has to comply with the tax obligations of the VAT group. Hence, the relevant EU rules permit the German legislator to provide that the controlling company is the taxpayer for the VAT group if this does not result in a risk of tax losses. Since Section 73 of the German Fiscal Code (AO) provides for a secondary liability of the VAT group members for the taxes for which the controlling company is primarily held liable, the ECJ is of the opinion that there is no apparent risk of such losses.

2. German interpretation of financial integration too strict

According to the ECJ, the German prerequisite of a financial integration does not comply with the EU rules as the relevant provision in the VAT Directive does not require a relationship of subordination between the controlling company and the other VAT group members. Hence, if the controlling entity holds the majority of the shares/interest in a company, it is not required that the controlling company also holds the majority of the voting rights.

This clear statement by the ECJ should allow German taxpayers to prove the financial integration more easily in the future if the controlling entity is the majority shareholder of the relevant group member. This could be of special relevance in joint venture arrangements in which certain reserved matters require the unanimous consent of all shareholders to be actioned.  

3. Members of the VAT group still independent for VAT purposes

Perhaps of most interest to existing VAT groups is the answer of the ECJ regarding the tax status of VAT group members. According to the German understanding, VAT group members are not independent but are rather considered part of the business of the controlling company. As a consequence, supplies made between members of the VAT group and the controlling company are not subject to VAT but are regarded as intra-group supplies (nicht steuerbare Innenumsätze).

Confirming the opinion of the Advocate General the ECJ here ruled that a Member State is not permitted to automatically consider a member of a VAT group as not being independent for VAT purposes. Instead, according to the general rules provided by EU VAT law, it has to be reviewed whether the relevant member of the VAT group still pursues its own economic activity.

An own economic activity can be assumed if the relevant VAT member performs its activities in its own name, for its own account and its own responsibility, and bears the economic risk associated with the performance of the activities.

Even though the ECJ did not explicitly say that, if the aforesaid prerequisites are met, supplies within a VAT group are subject to VAT, the decision might result in a change in approach to intra-group supplies that previously were regarded as non-VATable. If so, the effects of a VAT group would only serve to simplify procedures and would no longer allow for VAT neutral supplies within a VAT group, which is currently one of the main reasons to establish a VAT group in Germany.

In particular, these decisions may have a significant impact on those VAT groups that make VAT-exempt supplies: the decisions could mean that a VAT group member receiving input supplies subject to VAT provided by another VAT group member would face an effective tax cost if those received supplies were attributed to VAT-exempt output supplies, such that a full input VAT recovery for the input supplies is not possible.


The consequences of the ECJ decisions as regards the taxation of the intra-group supplies are not so clear-cut as to allow a definitive statement on the future of the German VAT group rules to be made. It therefore remains to be seen how the Federal Tax Court, which will now have to rule on the underlying cases, will translate the decisions into German law. Depending on the decisions of the Federal Tax Court, a change of the relevant German rules might be necessary.

It is not likely that the German rules will be changed retroactively as regards the VAT treatment of intra-group supplies. However, it may be a good time for concerned VAT groups to consider the potential impact of such possible changes. If you would like to discuss these topics with us, please contact our Tax team or your usual Freshfields contact.


financial institutions, tax