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Independent cost-sharing groups

03 October 2017

A major upheaval in the banking, financial and insurance sectors

On 21 September 2017, the Court of Justice of the European Union (CJEU) handed down three much-anticipated rulings concerning the application procedures for the exemption of services provided by a cost-sharing group to its members provided by article 132 (1) (f) of the VAT Directive (the “IGP provisions”).

Given the clarifications already issued by the CJEU in its Commission vs Luxembourg ruling (Case C-274/15), the solution adopted by the Court considerably restricts the scope of this mechanism, in particular by finding that only activities of general interest are eligible, to the exclusion of other exempt activity.

The Court explicitly specifies that the exemption of cost-sharing groups does not apply to operations carried out in the field of insurance and reinsurance or to those in the field of financial services.

This restrictive analysis, suggested in her conclusions in the Aviva case by Mrs Juliane Kokott, is based solely on a strict reading of the arrangement of provisions in the Directive, since the exemption of cost-sharing groups appears in a chapter devoted to general-interest exemptions.

She was contradicted, ultimately ineffectively, by the more systematic and historical analysis provided by the Advocate General Melchior Wathelet, who was much more convincing in our opinion.

By consequence of its finding, the Court declares that Germany has failed to fulfil its obligations under article 132 (1) (f) of the directive by restricting the VAT exemption to IGPs to the health sector.

But the Court's findings will also surprise the vast majority of Member States in light of what they had come to expect following the aborted negotiations over the draft banking, financial and insurance services directive, during which (2008) Member States had accepted the VAT Directive's inclusion of the services in question within the exempt-IGP provisions.

This interpretation causes massive upheaval to companies in the banking, financial and insurance sector which – in all European Union Member States, but particularly those such as France which do not offer taxpayers VAT Group status – widely use this exemption for services provided by a group to its members. Indeed this system avoids considerable extra processing of VAT which, it should be remembered, will ultimately only push up the cost of services provided to end consumers.

In view of the Court's findings, in cases which involved companies from economic sectors deemed to be excluded from the mechanism (apart from the question submitted in the Commission vs Germany), it refrained from addressing the questions put to it and which related particularly to the territorial application scope of IGP provisions.

In the situation created by this case law, one radical solution that appears to us to be justified by the situation, would involve Member States amending the Directive via a decision which would need to be unanimous.

Member States which currently admit IGPs in the insurance and banking sector will have to amend their national legislation to comply with the CJEU's finding for the future.

As for the past, the Court specifies that the principles of legal certainty and non-retroactivity should, in the concerned Member States, prevent banking or insurance IGPs exemption from being denied by the Tax authorities and domestic juridictions.

Rulings of 21 September 2017, Case C-616/15, Commission vs Germany, C-605/15, Aviva and C-326/15, DNB Banka