Germany: Limited partnerships to form VAT group subsidiaries

November 7, 2013

VAT groups

VAT grouping is a facility that can be applied in a number of European Union (EU) member states. It allows business entities that are closely linked to be treated as a single taxable person.

The specific rules for grouping vary between member states, but in general its aim is to allow entities that are legally separate but under common control to be treated as if they were a single legal entity. As such, it allows corporate groups to be treated in the same way as corporations that are organized in divisions.

As such, VAT grouping is often seen as a useful facility for corporate groups looking to streamline their VAT administration, reduce VAT leakage and improve VAT cash flow on intra-group transactions.

German VAT grouping rules

The German VAT Code exclusively permits companies to be considered as “controlled VAT group subsidiaries.” In principle, any legal entity with a business activity is to be treated as an independent taxable person for VAT on a stand-alone basis, regardless of whether it is a partnership or company.

However, the German VAT Act stipulates that legal entities that are “integrated financially, economically and organizationally” into another taxable person are not independent.

Unlike in other EU member states, the VAT group scheme is compulsory in Germany if the satisfying conditions are met and no special application for grouping is required. As a result, the dependent entities and the controlling taxable person that are integrated are considered to be a single taxable person (the VAT group).

What are the effects of grouping in Germany? The VAT group members make a single declaration of all output and input VAT amounts in one joint VAT return.

In addition, the VAT group means that all supplies exchanged between the VAT group members are not subject to VAT (i.e., they are disregarded for VAT purposes and do not attract any tax). As a result, the VAT group allows entities that have no (or limited) input VAT recovery (e.g., because they make VAT-exempt supplies) to reduce the costs from non-recoverable input VAT that would otherwise result from intragroup supplies of goods and services.

Furthermore, a VAT group may lead to substantial cash flow advantages, since there is no need to finance output VAT or wait for recovery of input VAT for supplies exchanged between the VAT group members.

The decision of the Munich Tax Court

The Munich Tax Court has decided to disallow limiting a VAT group so that it can only apply to companies as subordinated, controlled entities. As such, the court implies that the German rules are not in line with the EU VAT law that allows member states to use this facility.

According to the Munich Tax Court, partnerships constituted in the form of a GmbH & Co. KG can also be treated as integrated VAT group subsidiaries. This decision is based on the fact that the EU VAT Directive does not stipulate that VAT grouping is to be restricted only to companies, but rather uses the broader term “persons.”

Also, in the court’s opinion, there is no other valid reason for such a limitation. As a result, it concluded that the taxpayer may choose to apply the more favorable principles of the EU law (i.e., that the partnership may be treated as a single taxable person with other controlled entities).

The tax office has appealed against this judgment, and the case is now pending with the Federal Fiscal Court. Taxpayers must now await the Federal Fiscal Court’s decision to see whether it confirms the judgment of the Munich Tax Court. Given the EU law dimension, the Federal Fiscal Court might also refer the case to the European Court of Justice (CJEU).

The full version of this article was published in EY´s Indirect Tax Briefing, issue 8 (PDF, 3.28 MB)

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