Judgment summary
The request concerned the interpretation of Article 11 of Council Directive 2006/112/EC on the common system of value added tax [1]. It arose from a dispute between Sampension Livsforsikring A/S and the Skatteministeriet (Ministry of Taxation, Denmark) about the refusal of an application for joint VAT registration by that company and its subsidiary, Sampension Administrationsselskab A/S (the management company) [2].
The referring court asked two questions. The first was whether Article 11 precludes national legislation requiring that one person in a VAT group directly or indirectly own 100% of the other members where those members carry out activities not subject to registration or are not engaged in economic activity [13]. The second, referred only if the first was answered in the affirmative, was whether Article 11 has direct effect [13].
The Court held that Article 11 precludes such legislation unless the 100% ownership requirement constitutes a necessary and appropriate measure for attaining the objectives of combating tax evasion or avoidance [43]. It held that Article 11 does not have direct effect allowing taxable persons to rely on it against their Member State where national legislation is not compatible with it and cannot be interpreted consistently with it [53].
Background
Sampension Livsforsikring is an insurance company engaged in life-insurance and other financial activities connected with both occupational pensions and company pensions. Some of those activities are exempt from VAT under Paragraph 13 of the Law on VAT [5].
Until 1 January 2017, Sampension Livsforsikring was registered for VAT together with the management company under a single number in accordance with Paragraph 47(4) of the Law on VAT, and accordingly formed a VAT group with it. The management company took charge of the administrative tasks of Sampension Livsforsikring and of two pension funds not belonging to that group, and was wholly owned by Sampension Livsforsikring [6].
On 1 January 2017, both pension funds each acquired 3% of the management company's share capital [7]. As a result, Sampension Livsforsikring no longer owned 100% of the management company's capital, and the VAT group ceased to exist because it no longer met the 100% ownership condition in Paragraph 47(4) of the Law on VAT [8].
By letter of 15 January 2019, Sampension Livsforsikring requested re-registration jointly with the management company for VAT purposes, arguing that the 100% ownership condition did not comply with EU law, in particular Article 11 of the VAT Directive [9]. By decision of 8 February 2019, the Skattestyrelsen (Danish Tax Agency) rejected the request on the ground that the condition had not been met [10]. On 13 December 2021, the Landsskatteretten (National Tax Tribunal) upheld that decision and added that Sampension Livsforsikring could not rely on Article 11 because it did not have direct effect [11].
Sampension Livsforsikring appealed to the retten i Lyngby (Lyngby District Court), which referred the case to the Østre Landsret (High Court of Eastern Denmark) on the ground that it raised issues of principle. That court stayed the proceedings and referred the questions [12].
Core dispute
The dispute concerned whether the Danish requirement that one member of a VAT group directly or indirectly own 100% of the capital of the other members, where members carry out activities exempt from VAT or not engaged in economic activity, was compatible with Article 11 of the VAT Directive [8], [14].
Sampension Livsforsikring argued that the 100% ownership condition did not comply with Article 11 [9]. The Danish tax authorities maintained that the condition had not been met and that Article 11 did not have direct effect [10], [11]. A further issue was whether taxable persons could rely on Article 11 directly against a Member State [13].
Court findings
The Court first examined whether a 100% ownership condition could be based on the first paragraph of Article 11 [15]. It recalled that the provision aims either to simplify administration or to combat abuses, and that the concept of close financial links must be given an autonomous and uniform interpretation and cannot be interpreted narrowly [16], [19], [20].
The Court noted that Article 11 does not allow Member States to impose conditions on eligibility other than establishment in the territory and being closely bound by financial, economic and organisational links [21]. A relationship of subordination, including 100% ownership, may allow it to be presumed that relations are close, but it cannot in principle be a necessary condition for forming a VAT group [22]. Close financial links can also exist where the capital holding is less than 100% [26]. The Court concluded that a 100% ownership condition goes beyond the condition relating to close financial links and cannot be regarded as simply clarifying it, as the Danish Government acknowledged at the hearing [25], [27].
The Court then examined whether the condition could fall within the measures Member States may take under the second paragraph of Article 11 to prevent tax evasion or avoidance [28]. It held that it is for the referring court to determine whether the condition serves those objectives [30]. The Court stated that the mere existence of a tax advantage from the VAT group scheme does not amount to tax evasion or avoidance, and that a mere reduction in tax revenue resulting from the Member State's choice to implement the mechanism cannot in itself constitute tax evasion or avoidance [33], [36]. It also observed that a purely theoretical risk of tax evasion or avoidance cannot found a general and absolute rule restricting access, and that the objectives put forward by the Danish Government did not relate to the risk of tax evasion or avoidance [37].
The Court directed the referring court to assess the condition against the principle of proportionality, noting that the tax advantage is the same whether 100% or less of the capital is owned, so long as close financial links exist, and that the condition distinguishes on the basis of capital structure rather than a real risk of tax avoidance [38], [39]. The referring court must also ascertain whether the condition complies with the principle of fiscal neutrality, which precludes treating economic operators carrying out the same transactions differently [40], [41].
On the second question, the Court recalled that provisions of a directive must be unconditional and sufficiently precise to have direct effect [45]. Relying on its earlier ruling on Article 4(4) of the Sixth Directive, to which Article 11 corresponds, the Court held that the condition requiring close links needs to be specified at national level and is therefore conditional, so it does not satisfy the conditions for direct effect [46], [47], [48], [49]. The Court noted the obligation on national courts to interpret national law in conformity with EU law to the greatest extent possible [52].
Outcome
The Court ruled that Article 11 of the VAT Directive precludes legislation of a Member State which makes eligibility to form a VAT group, comprising persons carrying out activities subject to VAT and persons carrying out activities exempt from VAT or not engaged in economic activity, subject to the condition that one person in the group owns, directly or indirectly, all of the capital of the other person or persons, unless that requirement constitutes a necessary and appropriate measure for attaining the objectives of combating tax evasion or avoidance [43], [operative part 1].
The Court further ruled that Article 11 does not have direct effect allowing taxable persons to rely on it against their Member State where that State's legislation is not compatible with it and cannot be interpreted in a manner consistent with it [53], [operative part 2].
The decision on costs is a matter for the referring court [54].
Major issues / areas of contention
- Whether a 100% capital ownership condition can be based on the concept of close financial links in the first paragraph of Article 11 of the VAT Directive.
- Whether such a condition can be justified under the second paragraph of Article 11 as a measure to prevent tax evasion or avoidance.
- Whether a mere tax advantage or reduction in tax revenue from the VAT group scheme amounts to tax evasion or avoidance.
- Whether the 100% ownership condition complies with the principles of proportionality and fiscal neutrality.
- Whether Article 11 of the VAT Directive has direct effect that taxable persons may rely on against a Member State.