VAT group serves in particular to simplify tax declarations in practice since only one tax declaration needs to be filed for the whole group of companies that is consolidated for VAT purposes, i.e. the controlling company and all of the controlled companies. Moreover, in the case of companies whose supplies are exempt from VAT (e.g. banks or insurance companies) the VAT group can save on VAT.
Unlike corporate income tax or trade tax groups, a VAT group does not require the conclusion of a profit and loss transfer agreement. Rather, a VAT group exists if the statutory requirements of section 2(2) German VAT Act are fulfilled. A VAT group that is not recognised can lead to quite considerable risks for the controlling company: In this case, the controlling company is obliged to pay the tax authority the VAT owed on the controlled company’s supplies although the controlled company, not the controlling company, received the money owed for the supplies. The controlling company is entitled to compensation from the controlled company; such entitlement is, however, mostly worth nothing in the event of the controlled company’s insolvency.
Incorporation of subsidiary partnerships into VAT groups?
VAT groups have been the subject of dispute for many years. These discussions mainly focused on the issue of incorporating partnerships into VAT groups. As provided by law under section 2(2) no. 2 German VAT Act, only corporations are recognised as controlled companies whereas subsidiary partnerships are not. In more recent decisions, however, the European Court of Justice (cf. judgment of 16 July 2015 – C-108/14 and C-109/14 – Larentia+Minerva and Marenave Schiffahrt) and the Federal Fiscal Court have allowed subsidiary partnerships to be incorporated into VAT groups since EU law does not provide for such restriction to corporations (cf. Article 11 para. 1 VAT directive).
The VAT Senates of the Federal Fiscal Court disagree on the requirements for incorporating subsidiary partnerships into VAT groups, however:
- The Fifth Senate only recognises a partnership as a controlled company if, along with the controlling company, only shareholders in which the controlling company holds the majority of the voting rights participate in the partnership (Federal Fiscal Court, judgment of 2 December 2015 – V R 25/13).
- On the other hand, the Eleventh Senate of the Federal Fiscal Court presumes that – regardless of a participation of the controlling company in the other shareholders – only "capital structured" partnerships, i.e. partnerships in which the personally liable shareholder is a corporation (such as a GmbH & Co. KG), can be controlled companies (Federal Fiscal Court, judgment of 19 January 2016 – XI R 38/12; likewise Federal Fiscal Court, judgment of 1 June 2016 – XI R 17/11).
These different decisions of the Federal Fiscal Court gave rise to compliance risks for companies since, depending on the ruling taken as a basis, a VAT group was presumed in certain cases but not in others. In practice, this situation was somewhat alleviated by the decision of 24 May 2016 of the Upper Tax Authority Frankfurt/Main in consultation with the heads of the VAT departments of the highest tax authorities of the Federal Government and the Federal States: According to that, the principles of the rulings of the Federal Fiscal Court were generally not to be applied by the tax authorities for the time being (cf. Upper Tax Authority Frankfurt/Main, decree of 24 May 2016 – S 7105 A - 22 - St 110; see Compliance Newsletter October 2016, p. 11 et seq. in that regard).
By decree of 26 May 2017, the Federal Ministry of Finance has now at last stated its position on this issue: The Federal Ministry of Finance is in favour of incorporating partnerships if – apart from satisfying the other statutory prerequisites for a VAT group – along with the controlling company the shareholders are merely entities in which the controlling company holds the majority of the voting rights. With that, the Federal Ministry of Finance follows the case law of the Fifth Senate.
In order to apply this case law, the Federal Ministry of Finance provides a transitional rule: According to the decree of the Federal Ministry of Finance, these principles are only applicable to supplies rendered after 31 December 2018. The Federal Ministry of Finance will not, however, object should those participating in the group of companies agree in advance to apply the principles of the Federal Ministry of Finance’s decree of 26 May 2017. This will depend on the fact that all of the participants’ tax assessments that are affected can still be amended.
It is very welcome news that the Federal Ministry of Finance has taken a clear stance on incorporating partnerships in VAT groups, hence providing legal certainty in practice.
Given the decree from the Federal Ministry of Finance, for the time following the expiry of the transitional period on 31 December 2018, companies are required to review whether subsidiary partnerships or partnerships controlled through a subsidiary are incorporated into a VAT group in compliance with the principles of that decree of the Ministry. It is necessary to note that the legal consequences of the VAT group occur by law and there is no right of option. The companies can, however, make their own arrangements as to whether they fulfil the requirements for a VAT group or not. Should no VAT group with subsidiary partnerships or partnerships controlled through a subsidiary be required as from 1 January 2019, the VAT group can be averted, for example, by a minority shareholder participating in the subsidiary partnership in which the controlling company does not hold the majority of the voting rights.