As a rule, affiliated companies are subject to VAT on a stand-alone basis, unless they belong to a VAT group. Within such VAT group, the controlling parent company is considered as the sole VAT entrepreneur and has to file consolidated VAT returns for all VAT group members. Transactions within the VAT group are disregarded as non-taxable internal transfers.
A company is member of a VAT group not by election, but by force of law if it is financially, economically and organizationally integrated into its parent company.
A company is “organizationally integrated” if the parent company is in a position to ensure that its instructions are followed in the day to day business at the level of the subsidiary. In practice, this is often ensured by appointing the parent’s managing director as the subsidiary’s managing director.
The Federal Ministry of Finance (BMF) has issued a new circular guidance addressing the requirements of an organizational integration. Hereunder, a subsidiary is considered as organizationally integrated into the parent company, if
- the parent company’s personnel is appointed to the subsidiary’s management board;
- the parent company and its subsidiary enter into a domination agreement, even if supervisory restrictions apply.
A subsidiary can further be organizationally integrated into an ultimate parent company through an indirect chain of ownership if the ultimate parent dominates its indirect subsidiary’s business by way of management. This may be demonstrated by measures aimed at achieving an integration between two subsidiaries, even if these measures do not follow the chain of ownership (e.g. in case of sister companies or in a matrix organization). Furthermore, the requirement can be met where the required influence is executed only indirectly through an operating or non-business subsidiary of the parent company as part of the chain.
The new guidance extends the potential scope of VAT groups. As a VAT group becomes effective by force of law rather than by election, this extension could potentially affect affiliated companies’ VAT status, especially in multi-tier or matrix organizations. As the rules laid down in the new guidance are applicable to all pending and future cases, we strongly recommend reviewing, whether companies within an affiliated group previously excluded from the VAT group now become part of a VAT group under the new rules.
By Jossip Hesse