ECJ tackles VAT exemption for costs sharing groups
On 21 September three rulings have been issued by the ECJ which will have a significant impact on the costs structure of businesses in the financial sector. The ECJ explicitly ruled that the CSGs scheme cannot be applied in the banking and insurance sector, in which businesses often rely on the CSGs scheme to mitigate VAT leakage. The CSGs scheme now seems to be blocked for such businesses, which will likely result in an additional VAT burden.
Under certain conditions services provided by cost sharing groups (CSGs) to their members, whose activities are VAT exempt or out of scope of VAT, can benefit from a specific VAT exemption (the CSGs scheme). In the rulings issued today, the European Court of Justice (ECJ) provides further guidance as to the scope and conditions of the CSGs scheme.
The CSGs scheme had previously been understood to cover services provided by CSGs to their members that are directly necessary for the VAT exempt activities of these members, regardless of the type of VAT exempt or out of scope activities conducted by the members. However, according to the ECJ the CSGs scheme is limited to CSGs whose members conduct activities in the public interest (e.g. healthcare, education). This means that the CSGs scheme cannot be applied in the banking and insurance sector. The outcome deviates from the position of the European Commission and might push the European Commission to revisit its proposal clarifying the VAT treatment of insurance and finance services, at least insofar it concerns the introduction of a CSGs scheme for the banking and insurance sector.
Consequences in the Benelux
In the Netherlands, the CSGs scheme (koepelvrijstelling) is not limited to a certain sector. Also banks and insurance companies can currently benefit from the CSGs scheme. The question rises whether the rulings sort immediate effect, in the sense that CSGs in the financial sector would be liable to VAT. We feel that this should not be the case. In our view, Dutch CSGs should still be able to invoke the CSGs scheme, until the Dutch VAT legislation is explicitly brought in line with the ECJ rulings.
In Luxembourg, CSGs schemes are commonly set up to benefit the insurance, banking and funds sectors. As a result, the rulings of the ECJ are of significant importance to the financial markets.
Following a ruling of the ECJ of 4 May 2017, in which the ECJ ruled on the illegality of Luxembourg’s provisions on the CSGs scheme, the Authorities have decided to repeal the Grand-Ducal Regulation dated 21 January 2004, as being the source of the infringement. This step still needs to be formally taken.
With the rulings at hand, the debates can now shift to the potential alternatives, such as a modified CSG regime, and/or a VAT grouping scheme. No doubt, however, that a transitional period should be provided for, allowing the different sectors to adapt to this new state of affairs.
In Belgium, the CSGs scheme currently covers services provided by CSGs to their members that are directly necessary for the VAT exempt or out of scope activities of these members, regardless of the type of VAT exempt or out of scope activities conducted by the members. One cannot exclude that the Belgian legislator would adapt the current wording of the exemption in the Belgian VAT Code and/or adapt the implementing circular letter in line with the position that the ECJ has taken today, but until then the principle of legal certainty and non-retroactivity should guarantee that Belgian CSGs should be able to invoke the CSGs scheme. Meanwhile, CSGs that are affected by the ECJ rulings could consider alternatives like VAT grouping.
HélèneBourleauAttorney at law Associate
Hélène Bourleau is a member of the Indirect Tax Practice Group in Belgium and of the Italian Desk. She is an associate in our Brussels office and focusses on indirect tax matters.T: +32 2 773 23 83 E: firstname.lastname@example.org
LeviGoossensAttorney at law Associate
Levi Goossens is a member of the Loyens & Loeff Indirect Tax Practice Group. He also is a member of the Financial Institutions Team. Levi works as an associate in the Brussels office in Belgium.T: +32 2 743 43 81 E: email@example.com
BertGeversAttorney at law Local Partner
Bert Gevers is a local partner in our Brussels office. He heads of the Loyens & Loeff Indirect Tax Practice Group in Belgium, is a core member of the Corporate Investigations Team and co-heads the Food and Beverages Team.T: +32 2 743 43 18 E: firstname.lastname@example.org