Reverse Skandia: VAT on services provided by head office to branch – The Danske Bank case

On 11 March 2021, the Court of Justice of the European Union (CJEU) released its decision in the Danske Bank case[1] concerning supplies of services from a head office of a company that was part of a VAT group in one EU member state to its branch in another member state.

The Court confirmed that in such cases, the head office is to be considered as a separate taxable person from its branch, situated in another member state, when supplying services to that branch. Consequently, the services between the head office and the branch fall within the scope of VAT and must be subject to the reverse charge in the country where the branch is established.

Following this case, the Court extends the application of the Skandia principle:

• not only to a pure EU context (in Skandia, the head-office was established in the US and the branch was part of a VAT group in Sweden)
• but also in the case where the head office is part of a VAT group and the branch, situated in another member state than the head office, is not.

Background

Danske Bank A/S has its head office in Denmark and has set up a branch in Sweden to provide banking services in Sweden. In Denmark, the head office of Danske Bank is a member of a VAT group together with other group entities established in Denmark.

The bank uses an IT platform to run its banking operations across the different countries in which it is established. The costs related to the platform are recharged by the bank’s headquarters in Denmark to its foreign branches, including the Swedish branch.

As part of a ruling request in Sweden, Danske Bank sought to obtain confirmation that the recharge was not subject to VAT. The Swedish tax authorities considered that, considering the Danish headquarters’ membership of the VAT group, the Swedish branch must be considered as a separate taxable person for VAT purposes and, therefore, the recharges were subject to VAT.

Decision of the CJEU

The CJEU confirmed that where a head office and a branch are located in different EU member states and one of them is part of a VAT group, the head office and the branch are considered as separate taxable persons, with the result that supplies between them are within the scope of VAT.

Implications

In Belgium, this broad interpretation of the Skandia case has been applied since 2015. However, some countries like the Netherlands and Germany have applied Skandia more restrictively. As a consequence, they may have to change their interpretation following this judgement.

This case will no doubt impact the financial sector in which the VAT grouping is broadly used. Businesses in this sector should:

• assess where transactions take place between a head office and its branch established in different member states and determine whether said entities are part of a VAT group
• determine the territorial scope of such VAT group
• identify the transactions and determine the VAT liability and
• assess the impact on their VAT deduction right.

[1] (C-812/19)