On January 27, 2022, on the website of the Court of Justice of the European Union (CJEU) the opinion of Advocate General Medina in Case C- 269/20 Finanzamt T versus S (ECLI:EU:C:2022:60), was published.
Introduction
The present reference for a preliminary ruling from the Bundesfinanzhof (Federal Finance Court, Germany) relates to the interpretation of Article 4(4) and point (b) of the first sentence of Article 6(2) of Sixth Council Directive 77/388/EEC and arose in the context of an action between S, a national foundation governed by public law, and Finanzamt T (Tax Office, T, Germany; ‘the Finanzamt’). The dispute relates: first, to the designation of S (qua its role as controlling company), together with the company providing its cleaning services, as a single taxable person for value added tax (VAT) purposes; and second, to the question as to whether a supply of services provided free of charge for a purpose falling within the sphere of the activity that S carries on in an official capacity (and incumbent upon it in the exercise of public authority) may be subject to VAT in accordance with point (b) of the first sentence of Article 6(2) of that directive.
This Opinion should be read together with my parallel Opinion in Case C‑141/20, Norddeutsche Gesellschaft für Diakonie which was delivered on 13 January 2022, notably because the scope of the first question referred by the Fifth Chamber of the Bundesfinanzhof (Federal Finance Court) in the present case corresponds to the first question referred by the Eleventh Chamber of that court in Case C‑141/20.
Legal framework
3. The Sixth Directive was replaced, from 1 January 2007, by Council Directive 2006/112/EC. The Sixth Directive remains applicable ratione temporis to the main proceedings.
4. Article 2 of the Sixth Directive provided that ‘the following shall be subject to value added tax: 1.the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such’.
5. Article 4 of that directive provided:
‘1. “Taxable person” shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.
…
4. The use of the word “independently” in paragraph 1 shall exclude employed and other persons from the tax in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability.
Subject to the consultations provided for in Article 29, each Member State may treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organisational links.
5. States, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with these activities or transactions.
However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition.
In any case, these bodies shall be considered taxable persons in relation to the activities listed in Annex D, provided they are not carried out on such a small scale as to be negligible.
Member States may consider activities of these bodies which are exempt under Article 13 or 28 as activities which they engage in as public authorities.’
6. Point (b) of the first sentence of Article 6(2) of the Sixth Directive stipulated that the following shall be treated as services for consideration:
‘supplies of services carried out free of charge by the taxable person for his own private use or that of his staff or more generally for purposes other than those of his business.’
The facts giving rise to the dispute in the main proceedings and the questions referred for a preliminary ruling
7. S, the applicant in the main proceedings, is a German foundation governed by public law and the sponsor of a university, which operates inter alia a university school of medicine. It is a taxable person and provides services for consideration (patient care). At the same time, as a legal person governed by public law, it performs tasks in an official capacity (the teaching of students) in respect of which it is not considered to be a taxable person.
8. S is the tax group parent (‘Organträgerin’), both of a university school of medicine and of U-GmbH. S is subject to VAT in respect of the economic activities that it carries out for consideration, while it is exempt from VAT in respect of activities that it carries out in the exercise of its powers as a public authority.
9. According to uncontested evidence from Finanzamt T, S is the controlling company of U-GmbH. U-GmbH provided S with cleaning, hygiene and laundry services and patient transport services. U-GmbH’s cleaning services were supplied at S’s premises, that is to say, throughout the building complex occupied by the university school of medicine, which includes, in addition to patient rooms, corridors and operating theatres, lecture rooms and laboratories. While hospital space is dedicated to patient care and falls within the sphere of S’s economic activities, lecture rooms, laboratories and so forth are used for student training and, consequently, fall within the sphere of activities carried out by S as a public authority.
10. The proportion of the total surface area to be cleaned and which was devoted to public authority activities amounted to 7.6%. For all cleaning services provided to S, U-GmbH received a total fee of EUR 76 085.48 for the year in question (2005). In the VAT returns relating to the university’s medical activities, S considered all the services provided to it by U-GmbH as non-taxable internal services supplied in the context of the single entity for tax purposes (VAT group).
11. Finanzamt T took the view, in an adjusted tax assessment for 2005 (consequent on an external audit), that S’s operations formed a single undertaking for which a common VAT return should be submitted and, consequently, only one tax assessment had to be issued. In that regard, Finanzamt T took the view that the cleaning services provided by U-GmbH to S in respect of its activities as a public authority were supplied within a single entity for tax purposes (VAT group). The cleaning services supported an activity, which was ‘other than [that] of [its] business’ and thus gave rise, in S’s case, to a benefit in kind within the meaning of point 2 of Paragraph 3(9a) of the Umsatzsteuergesetz (Law on value added tax; ‘the UStG’) (which transposes point (b) of the first sentence of Article 6(2) of the Sixth Directive). Since the total remuneration for the cleaning services provided by U-GmbH to S amounted to EUR 76 065.48 during the year at issue, Finanzamt T took the view, taking into account that the proportion of the area allocated to activities carried out by S as a public authority amounted to 7.6% of the total surface area cleaned, that EUR 5 782.50 corresponded to the cleaning of the areas used for public authority activities. After deduction of a profit mark-up, which it assessed at EUR 525.66, Finanzamt T set the taxable amount for the benefit in kind at EUR 5 257 and thus increased the turnover tax by EUR 841.12.
12. S’s objection to that assessment was rejected by that same Finanzamt. In the proceedings at first instance before the Niedersächsisches Finanzgericht (Finance Court, Lower Saxony, Germany), however, that court upheld S’s appeal. In that court’s view, it was indisputable that S as the controlling company and U-GmbH as the controlled company constituted a single entity for tax purposes (VAT group). That VAT group extended also to the activities of S carried out as a public authority. The conditions for the existence of a benefit in kind within the meaning of point 2 of Paragraph 3(9a), of the UStG were not met.
13. The order for reference arises in the context of an appeal on a point of law (Revision) introduced by Finanzamt T in the main proceedings before the Bundesfinanzhof (Federal Finance Court).
14. In the context of that action, the Fifth Chamber of the Bundesfinanzhof (Federal Finance Court) decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:
‘(1) Is the authorisation granted to Member States in the second subparagraph of Article 4(4) of [the Sixth Directive] to treat as a single taxable person persons established in their territory who, while legally independent, are closely bound to one another by financial, economic and organisational links to be exercised in such a way that:
(a) treatment as a single taxable person is effected through one of those persons, who is the taxable person for all of the transactions performed by those persons; or in such a way that:
(b) treatment as a single taxable person must of necessity – and thus, in addition, under sufferance of substantial tax losses – lead to a VAT group separate from the persons closely bound to one another, which constitutes a fictitious entity to be set up specifically for VAT purposes?
(2) If the correct answer to the first question is (a): does it follow from the case-law of the Court of Justice concerning non-business purposes within the meaning of Article 6(2) of [the Sixth Directive] (judgment of 12 February 2009 in VNLTO – C‑515/07, EU:C:2009:88) that, in the case of a taxable person who,
(a) on the one hand, pursues an economic activity and, in so doing, provides services for consideration within the meaning of Article 2(1) of [the Sixth Directive], and
(b) on the other hand, pursues at the same time an activity which is incumbent upon [it] in the exercise of public authority (an activity [it] carries on in an official capacity) and in respect of which [it] is not considered to be a taxable person, in accordance with Article 4(5) of [the Sixth Directive],
a service falling within the sphere of [its] economic activity which [it] provides free of charge for a purpose falling within the sphere of the activity [it] carries on in an official capacity is not subject to tax, in accordance with [point (b) of the first sentence of Article 6(2) of the Sixth Directive]?’
The conclusion of the Advocate General
The Advocate General proposes that the Court of Justice should answer the questions referred for a preliminary ruling by the Bundesfinanzhof (Federal Finance Court, Germany) as follows:
Question 1:
The second subparagraph of Article 4(4) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment (‘the Sixth Directive’) allows that persons – who, while legally independent, are closely bound to one another by financial, economic and organisational links – may, as a VAT group, be treated as a single taxable person in relation to the obligations concerning VAT.
However, the above provision of the Sixth Directive does not preclude that each member of that VAT group continues to be an independent taxable person.
Nevertheless, the same provision of the Sixth Directive precludes national provisions stipulating that only the controlling company of the VAT group becomes the taxable person of the VAT group, whereas the other members of that group are considered as non-taxable.
Question 2:
It follows from the answer given to question 1 that it is not necessary to answer question 2. In any case, point (b) of the first sentence of Article 6(2) of that directive is inapplicable to S’s activities as a public authority, that is, its non-economic activities.
From the analysis of the Advocate General
A. Brief summary of the arguments of the parties
First question
15. By its first question, the referring court asks, in essence, whether the second subparagraph of Article 4(4) of the Sixth Directive must be interpreted as precluding a Member State from designating, as a taxable person for VAT purposes, not the VAT group itself (‘Organkreis’) but a specific member of that group, that is, the controlling company (‘Organträger’).
16. The German Government submits analogous arguments on the first question to those it raised in the parallel Case C‑141/20. In essence, it contends that the option for Member States, provided for in the second subparagraph of Article 4(4) of the Sixth Directive, to treat as a single taxable person those persons established in their territory who, while legally independent, are closely bound to one another by financial, economic and organisational links, may be exercised in such a way that the treatment as a single taxable person relates (only) to one of those persons (that is, the controlling company), who is a taxable person for all the transactions of those persons.
17. In its analysis of the first question referred, the Commission raises the same arguments it submitted in the parallel Case C‑141/20. In essence, it submits that the second subparagraph of Article 4(4) of the Sixth Directive precludes national provisions stipulating that solely the controlling company of the VAT group becomes the taxable person of the group to the exclusion of the other members.
Second question
18. By its second question, the referring court asks, in essence, whether, in the case of an entity that carries out, first, economic activities for which it is a taxable person and, second, activities which it carries out in the exercise of public powers, in respect of which it is exempt from VAT under Article 4(5) of the Sixth Directive, the supply, free of charge, of services falling within its sphere of economic activity and intended for its field of activity as a public authority may be taxed under Article 6(2) of the Sixth Directive.
19. The German Government considers that that question should be answered in the affirmative. That government submits, in essence, that, in the case of a taxable person who, on the one hand, carries out an economic activity and thus supplies services for consideration within the meaning of Article 2(1) of the Sixth Directive and who carries out, at the same time, an activity as a public authority, in respect of which it is not considered to be a taxable person under Article 4(5) of that directive, the supply, free of charge, of a service in the field of that taxable person’s economic activity may be subject to tax under point (b) of the first sentence of Article 6(2) of the Sixth Directive.
20. In particular, the German Government submits that, unlike the approach followed under the heading of point (a) of the first sentence of Article 6(2) of the Sixth Directive, ‘non-economic’ needs should be regarded as being covered by the term ‘purposes other than those of [the] business’ within the meaning of point (b) of the first sentence of Article 6(2) of the Sixth Directive and must therefore fall within the scope of that provision.
21. In that regard, that government contends that its approach is not contradicted by the Court’s case-law on the concept of ‘purposes other than those of the business’ in judgments concerning point (a) of the first sentence of Article 6(2) read in conjunction with Article 17(2) of the Sixth Directive.
22. In the alternative, in the event that taxation of the benefit in kind is not permitted under point (b) of the first sentence of Article 6(2) of the Sixth Directive, the German Government submits that that taxation is, in any event, justified in respect of the services supplied in the context of activities falling within the non-economic sphere of an entity, such as S, under the second sentence of Article 6(2) of that directive, under which the Member States have the option to derogate from the provisions of that directive.
23. According to the Commission, there is no need to answer the second question in order to give an answer that would be useful to the referring court for the resolution of the case in the main proceedings.
B. Assessment
24. There are two main issues for the Court in the present case: (i) the question as to who should be designated as the taxable person of a VAT group, under the second subparagraph of Article 4(4) of the Sixth Directive (the first question referred); and (ii) how to treat the supplies of a legal person acting both in the public and private domain, for VAT purposes, when that person forms a single entity for tax purposes (a VAT group) with another person. In particular, the question is whether cleaning services supplied by a member of a VAT group to a body governed by public law whose activities are not taxable – a body which, for its part, is a member and the controlling company of that VAT group – constitute: (a) non-taxable internal supplies in the context of that VAT group; or (b) a supply carried out ‘free of charge’ (a benefit in kind), in respect of which VAT was payable (the second question referred).
On the first issue(the first question referred)
25. The first question referred concerns the designation of the single taxable person in the context of a VAT group under the second subparagraph of Article 4(4) of the Sixth Directive. That question corresponds, in essence, to the first question referred in the parallel Case C‑141/20.
26. In my parallel Opinion in that case, I have explained essentially that: (i) the members of a VAT group do not lose their status as a ‘taxable person’ as long as the members of the VAT group do not cease to carry out independent economic activities; (ii) when Member States exercise the choice afforded to them by Article 4(4) of the Sixth Directive and when they lay down certain conditions and modalities for VAT groups, they may not fundamentally alter the nature of the concept of a VAT group and the aim of that provision. Further, in transposing that directive and in defining the arrangements for giving effect to the rights that VAT groups and persons may derive from Article 4(4), the Member States’ legislation may not have the effect of depriving certain VAT groups and persons, which otherwise fulfil the related requirements under the Sixth Directive, of the benefit of those rights (which is, in fact, the case for the persons at issue in the present case and those in Case C‑141/20); (iii) the objectives of the second subparagraph of Article 4(4) are to prevent abuse and combat tax evasion and avoidance and to simplify administrative operations by exempting intra-group transactions from VAT.
27. As a result, I concluded in that Opinion that that provision of the Sixth Directive should be interpreted as: (i) allowing closely related persons, who are members of a VAT group, to be treated as a single taxable person for the purposes of VAT obligations; but at the same time as (ii) precluding Member State legislation (such as point 2 of Paragraph 2(2) of the UStG), which designates solely the member controlling the group – which holds a majority of the voting rights and holds a majority shareholding in the controlled company in the group of taxable persons – as the representative of the VAT group and the taxable person of that group, to the exclusion of the other group members.
28. The same conclusion is applicable in the present case, in so far as the relevant provision of German law at issue is the same as the one in Case C‑141/20 (that is, point 2 of Paragraph 2(2) of the UStG).
29. As I explain in the parallel Opinion, I consider that the above provision of the UStG manifestly goes beyond simplification of taxation of companies which are linked by providing that the controlling company constitutes the taxable person. That drafting of the UStG ignores, first, the independent legal personality of the companies linked and, second, their potential specificities as public bodies (such as foundation S in the main proceedings). Moreover, the above provision of the UStG restricts the freedom of the tax-group-arrangement scheme (VAT group) to designate its representative.
30. As pointed out by the Commission, the objective of administrative simplification pursued by Article 4(4) of the Sixth Directive is to designate, for the purposes of dealings with the tax authorities, the taxable person who must submit the tax return and pay VAT. In that regard, the VAT group, within the meaning of that provision, creates a single taxable person responsible for the submission of the tax return for the group without, however, removing the tax liability of the members of the group.
31. S, the German foundation governed by public law, and the company U-GmbH were linked to each other as a single entity for tax purposes (VAT group).
32. Point 2 of Paragraph 2(2) of the UStG provides that a legal person (the controlled company) which forms part of the business of another person (the controlling company) by reason of financial, economic and organisational links does not carry on its economic activity independently. In German law, the controlled company, which, considered autonomously, is a taxable person, is ultimately regarded as part of the controlling company (akin to a subsidiary) on account of those links.
33. That consideration has repercussions both for the activities carried out between the controlled company and the controlling company, as well as for the activities carried out by those companies for third parties; it is not the controlled company, but the controlling company that is considered by German law to be the taxable person liable for VAT on those transactions.
34. I refer here to my Opinion in the parallel Case C‑141/20 (points 71 to 80), where I set out a practical example, which demonstrates why point 2 of Paragraph 2(2) of the UStG constitutes an incorrect transposition of the Sixth Directive.
35. As pointed out by the Commission, in the factual situation of the case in the main proceedings, point 2 of Paragraph 2(2) of the UStG raises additional problems under the Sixth Directive. In the present case, S, the controlling company, is a public authority that carries on activities some of which are taxable and some of which are not. The controlled company, U-GmbH, provides cleaning services that are subject to VAT, both for the taxable activities of the public authority and for that authority’s own non-taxable activities. Due to the application of point 2 of Paragraph 2(2) of the UStG, given that the controlled company is no longer considered to be a taxable person but rather a mere subsidiary, it can no longer invoice for VAT in respect of its otherwise taxable activities.
36. I consider that, as an independent taxpayer, the cleaning company U-GmbH entered in its tax return the VAT charged in respect of services supplied both for the taxable activities and for the non-taxable activities of S. In fact, that public authority cannot deduct the VAT charged on services provided for the purposes of its non-taxable activities.
37. The VAT return submitted for the VAT group should be an aggregation of all of the individual VAT returns of each member of the group. Therefore, it is no longer necessary to enter separately in the accounts the supply of services under point (b) of the first sentence of Article 6(2) of the Sixth Directive, as the corresponding services are provided as a benefit in kind. Consequently, if the cleaning company is considered, for the purposes of German law, as a subsidiary of the public authority, the VAT relating to the goods purchased for the purposes of supplying its cleaning services should be commensurate to the non-economic activities of the public authority.
38. It follows that the German provisions do not merely constitute a simplification, they create an additional tax burden for persons and VAT groups and are incompatible with the second subparagraph of Article 4(4) of the Sixth Directive.
39. If the exclusive tax liability of the controlling company for the controlled companies in accordance with point 2 of Paragraph 2(2) of the UStG is precluded because it infringes EU law, the controlled companies must pay tax on their transactions.
40. As the referring court pointed out, if the conclusion is reached that there is no ‘Organschaft’ (VAT group regime) between S (the controlling company) and U-GmbH (the controlled company), U-GmbH would be required to pay VAT on the activities which it carries out, for example, for a public authority or for other undertakings which do not enjoy any right to deduct.
41. Finally, I would like to address – as the academic commentary pointed out – the somewhat surprising formulation of the first question referred and of the order for reference, in so far as the referring court (the Fifth Chamber of the Bundesfinanzhof (Federal Finance Court)) warns against the answer to the first question in the alternative (b) (that is, the answer I am proposing in this Opinion), ‘under sufferance of substantial tax losses’ and because ‘the answer to the first question is of great significance not only to the case at issue but also to tax revenue in Germany’ and ‘the answer to [that] question in the alternative (b) would have significant repercussions in terms of tax’.
42. Suffice it to state that, for several years, considerable doubts as to the compatibility of the German VAT group regime with the Sixth Directive have been expressed in national case-law, in EU case-law (for instance, in the judgment of 16 July 2015, Larentia + Minerva and Marenave Schiffahrt (C‑108/14 and C‑109/14,EU:C:2015:496)) and in academic commentary. Hence, Germany has had sufficient time to take steps in order to remedy the problems identified regarding its VAT group regime. In any case, a Member State may not remain inert and ignore such case-law and academic commentary only then to argue that if the Court rules that its legislation is incompatible with EU law, it would lose significant tax revenue. In any case, in fact, at least some concrete steps in the right direction, towards the reform of the VAT group regime in Germany, have already been taken.
43. Therefore, I consider that the first question referred should be answered, in essence, in line with alternative (b), that is, that the authorisation granted to Member States in the second subparagraph of Article 4(4) of the Sixth Directive is to be exercised in such a way that the treatment as a single taxable person must lead to a VAT group distinct from the persons closely bound to one another, and which constitutes a fictitious entity specifically for VAT purposes.
On the second issue (the second question referred)
44. The referring court made the answer to the second question referred conditional on a positive answer to the first question and, at the same time, it excluded the possibility that the German single entity for tax purposes is considered to be compatible with the Sixth Directive in case the first question is answered in the negative. It follows that, given my proposed answer to the first question, the answer to the second question is hypothetical and unnecessary for the resolution of the case in the main proceedings.
45. However, for the sake of completeness, I will make the following comments on the second question referred.
46. By that question, the referring court asks, in essence, whether, in the case in the main proceedings, S (as a public authority) may be taxed under Article 6(2) of the Sixth Directive.
47. First, in the judgment of 12 February 2009, Vereniging Noordelijke Land- en Tuinbouw Organisatie (C‑515/07, EU:C:2009:88, paragraph 38; also referred to as ‘the VNLTO judgment’), the Court made clear that ‘[point (a) of the first sentence of Article 6(2)] of the [Sixth Directive] is not intended to establish a rule that transactions outside the scope of the system of VAT [such as non-economic transactions] may be considered to be carried out for “purposes other than” those of the business within the meaning of that provision. Such an interpretation would have the effect of rendering Article 2(1) of the directive meaningless’.
48. I consider that that consideration is applicable mutatis mutandis in relation to point (b) of the first sentence of Article 6(2) of the Sixth Directive.
49. Secondly, it should be borne in mind that point (b) of the first sentence of Article 6(2) of the Sixth Directive relates only to transactions effected ‘free of charge’, which are to be treated as supplies effected for consideration for VAT purposes.
50. However, it follows from the order for reference that, in the case in the main proceedings, U-GmbH received compensation from S for its cleaning services for the year in question – both in the context of its economic activity as well as in its activity as a public authority.
51. Indeed, as the Niedersächsisches Finanzgericht (Finance Court, Lower Saxony) ruled at first instance in the main proceedings, activities carried out for ‘purposes other than’ those of the business, according to point (b) of the first sentence of Article 6(2) of the Sixth Directive, are supplies of services carried out by the taxable person for its own private use or that of its staff.
52. In contrast, an undertaking’s sphere of activity falls within the scope of non-economic activities in the strict sense (and not within the scope of ‘purposes other than’ those of the business) where, as in the present case, a legal person governed by public law performs a service falling within the sphere of public authority.
53. It follows that point (b) of the first sentence of Article 6(2) of the Sixth Directive is, in any case, inapplicable to S’s activities as a public authority, that is, its non-economic activities.
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