Transactions between two establishments of a single legal entity

Update of forthcoming case

An important case concerning the VAT treatment of supplies between establishments of a single legal entity (head office to branch, branch to head office, branch to branch, etc).

The Advocate General delivered his opinion recently on the Italian referral in the case of FCE Bank plc (C-210/04). This concerns the question of whether any transactions between two establishments of a single legal entity, including any which might be seen as the passing on of costs, can be seen as supplies for VAT purposes. The case arose as a result of the Italian tax authorities seeking to impose VAT on the receipt of charges by an Italian branch of FCE Bank by an overseas head-office.

The Advocate General opined that the charge, in such circumstances, is not liable to VAT. If the ECJ follows the opinion of the Advocate General, the case will confirm the procedure adopted in Ireland.

In Ireland, transactions between two establishments of a single legal entity (head office to branch, branch to head office, branch to branch) are not regarded as supplies for VAT purposes, with the exception of certain transactions between establishments of a single legal entity who are in VAT groups. However, that is not necessarily the instinctive reaction of the tax authorities in other Member States, particularly in the more southern European countries where there have been sporadic instances of reports of attempts to collect VAT on intracompany transactions (e.g. reverse charge VAT on services from an overseas head office to a local branch, or output VAT on services from a local branch to an overseas head office where those services are considered to be consumed locally). We hear that the Ministerial view in these countries is that VAT should not apply to intracompany supplies, but this message does not always seem to filter down to the tax officials.

The argument is sometimes heard that, as we apply VAT to goods moving across borders between different establishments of a single legal entity, it is illogical not to apply VAT similarly to services. The argument is also heard that the failure to tax cross-border intracompany supplies opens up a manipulation opportunity to exempt and partly exempt businesses.

There is some hope of certainty in this matter in that the second and latest incarnation of the 'place of supply' proposal — which is still under discussion in the Council of Ministers and which the Commission hopes to implement from 1 July envisages a clear legislative statement being added to the Sixth VAT Directive, 'Where a single legal entity has more than one fixed establishment, services rendered between the establishments shall not be treated as supplies', with no exceptions to this rule.

However, this may not be the end of the story. The European Commission is aware that certain Member States still hold the view that they should be permitted to treat intracompany transactions as supplies, where multinational exempt and partly exempt companies are perceived to manipulate the rules by incurring costs in a low VAT rate jurisdiction, thereby minimising irrecoverable VAT, and then recharge those costs intracompany with no further VAT implications.

We understand that, in the Commission's earlier deliberations on the new place of supply rules, it had considered inserting a permissive regime which would have enabled Member States to tax intracompany transactions in these circumstances. As tends to happen, if the Commission feels that a particular aspect of a proposal may be controversial and may delay the unanimous agreement necessary for adoption, it is prone to withdrawing that aspect and deferring it to a later date. In this case, the first incarnation of the place of supply proposal included a statement that the question of intracompany transactions, where multinational exempt and partly exempt companies are perceived to take advantage of the fact that such transactions are not regarded as supplies, would be considered at a later date, when the Commission moves on to reviewing the whole question of exemptions from VAT.

This case is important for those who either issue or receive charges to/from entities within the same legal entity. The issue of these charges is very current given the recent UK VAT and Duty Tribunal decision in the case of the Zurich Corporate Group and the Commission’s publication of its proposals in respect of the place of supply of services in the EU.

If you issue or receive fees from entities within the same legal entity, we recommend that you consider whether these charges are liable to VAT in light of the recent UK Tribunal decision and the impending Advocate General’s opinion in the case of FCE Bank plc. If you require additional information or clarification on this matter, please contact Brian Keenan or Breen Cassidy .