Denmark’s Supreme Court issued a decision on 3 April 2024 on the VAT rules and the implications for transactions within VAT groups (known as “joint registration” in Denmark). The court ruled in favour of the Danish tax authorities, concluding that transactions between an insurance company and its subsidiary consisting of services rendered by the subsidiary to the insurance company were subject to VAT. The Supreme Court found that the services provided did not qualify as intragroup transactions under the national VAT law and regulations (which are aligned with article 11 (the VAT grouping provision) in the EU VAT Directive) because the purpose of the arrangement was to avoid VAT.
Under Denmark’s VAT law, companies have the option to apply for joint registration to function as a group for VAT purposes, which can simplify VAT administration and improve cash flow within corporate structures. Among the benefits of VAT grouping are that the group is considered a single company with a single VAT ID, and a single consolidated VAT return can be submitted, and intragroup transactions are disregarded for VAT purposes. However, each group member is jointly and severally liable for the VAT debts and liabilities of the entire group. Understanding the joint registration rules is crucial for companies looking to optimise their tax processes and ensure compliance with Danish VAT rules.
The tax authorities challenged the VAT treatment of the intragroup transactions, inter alia, on the ground that the subsidiary lacked substance and a commercial purpose since it did not have any employees and it outsourced the development of the IT and telephone system to subcontractors. This led to conflicting interpretations necessitating a resolution by the Supreme Court.
The insurance company argued that the services provided by its subsidiary were exempt from VAT under the rules applicable to intragroup transactions in VAT groups. The tax authorities, however, took the position that the transactions did not qualify for the exemption and that VAT should be applied, since the VAT group had been structured to avoid VAT.
The Supreme Court ruled in favour of the tax authorities, stressing that the true nature and purpose of intragroup transactions must be considered, rather than just their formal nature. The court also stated that the companies could not support the right to joint registration for a five-year period until the intragroup transactions no longer constituted abuse (after five years, the possible benefits of leasing the IT and telephone system without VAT is limited). Thereafter, the companies could rely on the benefits of the joint registration.
Camilla Gjermandsen Sakstrup
Louise Eide Hartung
BDO in Denmark
Under Denmark’s VAT law, companies have the option to apply for joint registration to function as a group for VAT purposes, which can simplify VAT administration and improve cash flow within corporate structures. Among the benefits of VAT grouping are that the group is considered a single company with a single VAT ID, and a single consolidated VAT return can be submitted, and intragroup transactions are disregarded for VAT purposes. However, each group member is jointly and severally liable for the VAT debts and liabilities of the entire group. Understanding the joint registration rules is crucial for companies looking to optimise their tax processes and ensure compliance with Danish VAT rules.
Supreme Court decision and its implications
The case before the court involved an insurance company that established a wholly owned subsidiary, whose main purpose was to develop IT and telephone systems for the insurance company’s use under a leasing agreement. The subsidiary would receive a full VAT deduction for the expenses incurred on the development of the IT and telephone systems. The subsidiary began leasing the IT and telephone systems to the insurance company and charged Danish VAT. Shortly thereafter, the companies were jointly registered for VAT purposes, with the result that no VAT was invoiced from the subsidiary to the insurance company for the leasing of the IT and telephone systems. In addition, the investment in the IT and telephone systems was not covered by the capital goods adjustment scheme in Denmark at the time, and therefore no were rules in place to adjust the original input VAT deduction, which was fundamental for creating the structure.The tax authorities challenged the VAT treatment of the intragroup transactions, inter alia, on the ground that the subsidiary lacked substance and a commercial purpose since it did not have any employees and it outsourced the development of the IT and telephone system to subcontractors. This led to conflicting interpretations necessitating a resolution by the Supreme Court.
The insurance company argued that the services provided by its subsidiary were exempt from VAT under the rules applicable to intragroup transactions in VAT groups. The tax authorities, however, took the position that the transactions did not qualify for the exemption and that VAT should be applied, since the VAT group had been structured to avoid VAT.
The Supreme Court ruled in favour of the tax authorities, stressing that the true nature and purpose of intragroup transactions must be considered, rather than just their formal nature. The court also stated that the companies could not support the right to joint registration for a five-year period until the intragroup transactions no longer constituted abuse (after five years, the possible benefits of leasing the IT and telephone system without VAT is limited). Thereafter, the companies could rely on the benefits of the joint registration.
Key takeaways
The Supreme Court’s decision has significant implications for companies, particularly those involved in intragroup transactions:- Legal precedent: The decision establishes a clear precedent on how VAT exemptions should be interpreted and applied in Denmark and provides guidance for future cases involving similar disputes over VAT treatment.
- Corporate compliance: The decision underscores the importance of compliance with the VAT rules for corporate groups. Companies must ensure that their intragroup transactions are structured and documented in a manner that aligns with both national and EU VAT laws.
- Tax planning and risk management: Businesses should carefully consider the VAT implications of their internal transactions, including thorough documentation and justification of the economic substance of intragroup services. Professional advice may be needed to manage tax risks effectively.
Camilla Gjermandsen Sakstrup
Louise Eide Hartung
BDO in Denmark