VAT GROUPING IN THE NORDICS

Sampension Livsforsikring carries on life insurance business and other financial activities. Certain of these types of business are exempt from VAT. The company was formerly VAT-grouped with its administration company, Sampension Administrationsselskab A/S, which was 100 % owned by Sampension Livsforsikring. The administration company also carried out administrative tasks for two pension funds outside the Sampension group. In 2017, those two pension funds each acquired 3 % of the administration company's share capital. However, as the Danish VAT Act requires 100 % ownership for groups combining VAT-liable and VAT-exempt members, the VAT group ceased to exist.

Sampension applied to be re-grouped in January 2019, arguing that the ownership condition was incompatible with EU law. The Danish Tax Agency refused, and the Danish National Tax Tribunal upheld that decision, finding that article 11 lacked direct effect. Sampension brought the case before the Lyngby District Court, which referred it to the Eastern High Court on the basis that it raised questions of principle, and the Eastern High Court in turn stayed proceedings and referred two questions to the General Court.

First of all, the General Court rejected the Danish government's argument that the 100 % ownership condition prevents loss of tax revenue by preventing VAT-exempt or non-economic members from buying goods and services VAT-exempt through the group. The General Court stated that a VAT benefit that simply follows from the VAT grouping rules is not fraud or evasion, and a purely theoretical risk is not enough to justify a general rule that excludes everyone. The 100 % ownership condition in section 47(4) of the Danish VAT Act (Da: "Momsloven") only distinguishes by reference to the group's capital structure rather than the actual risk of VAT evasion. The General Court went on to find that where the anti-evasion objective can be achieved through less restrictive measures, a systematic exclusion based on an abstract criterion unconnected to an actual risk goes further than necessary.

Therefore, the General Court ultimately held that article 11 of the VAT Directive precludes national legislation making VAT grouping conditional on one member owning 100 % of the other members' capital, unless that requirement is a necessary and appropriate anti-avoidance measure. The General Court noted that article 11 was adopted to allow Member States not to treat closely linked entities as separate taxable entities where their independence is "purely a legal technicality". It is for the referring court, the Eastern High Court, to assess, in addition to suitability and proportionality, whether the 100 % ownership condition complies with the principle of fiscal neutrality, which precludes different treatment of traders carrying out the same transactions.

The General Court emphasised that the close financial, economic and organisational link required by article 11 cannot be interpreted strictly and that a relationship of subordination cannot be made a necessary condition for VAT grouping. On the second question, the General Court held that article 11 does not have direct effect, relying on the Court of Justice's judgment in Larentia + Minerva and Marenave Schiffahrt (C-108/14 and C-109/14), which found that the equivalent provision in the Sixth VAT Directive lacked direct effect because the close-link condition requires national specification. Taxable persons therefore cannot rely on article 11 directly to compel grouping where national law is incompatible. National courts remain, however, bound by the duty of conforming interpretation.

The ruling does not automatically invalidate the Danish 100 % ownership condition. The General Court has left it to the Eastern High Court to assess whether the requirement is justified as a necessary and appropriate anti-avoidance measure and whether it complies with the principle of fiscal neutrality. As article 11 does not in itself confer an unconditional right to VAT grouping in the absence of national implementing measures, companies cannot at this stage rely solely on the General Court ruling to compel VAT grouping under Danish law. The Eastern High Court will now need to determine whether section 47(4) of the Danish VAT Act can be interpreted in conformity with article 11 or whether legislative amendments are required.

Due to the ruling from the General Court and/or the forthcoming ruling from the Eastern High Court, amendments to section 47(4) may be necessary to bring it into line with article 11. This could be achieved by introducing a broader financial, economic and organisational link test instead of the 100% ownership condition. Any legislative change is likely to take time, and time will tell how the commencement provisions will operate in practice.

Rather than waiting for legislative or judicial clarification, an affected company could request a VAT group registration going forward. It is important that such a request is argued on the grounds that the Danish VAT Act must be interpreted in the light of the General Court ruling. Such an application can stay pending the Eastern High Court's ruling or potentially a ruling from the Supreme Court should the ruling be appealed.

For previous VAT periods, affected companies should act now, within the ordinary deadlines (3 years from the relevant VAT filing deadline) in section 31 of the Danish Tax Administration Act (Da: "Skatteforvaltningsloven"), by filing reopening requests with reference to the obligation to interpret national law in conformity with EU law. Again, such reopening requests may stay pending the Eastern High Court's ruling. Waiting passively for the ruling carries a risk that ordinary deadlines will lapse in the meantime.

Extraordinary reopening of older VAT periods will typically only become available under section 32(1)(1) of the Danish Tax Administration Act once there has been a final rejection of Danish practice, whether by a court judgment or through the issuance of formal administrative guidance published by the Danish Tax Agency (Da: "Styresignal") which recognises that existing practice must be changed. Such guidance will normally specify which VAT periods can be reopened and within which deadlines.

Companies must observe the six-month response deadline in section 32(2). The deadline is calculated from the final ruling of the Eastern High Court/Supreme Court in case of an appeal or from when the formal guidance on a change of practice is published. It is therefore important to stay alert for the Eastern High Court ruling/any appeal and/or any formal administrative guidance on the subject. 

As Norway is not an EU member state, it is not bound by the VAT Directive (Council Directive 2006/112/EC), including article 11 on VAT grouping. VAT grouping in Norway is governed by section 2-2(3) of the Norwegian VAT Act (No: "Merverdiavgiftsloven"), which requires at least 85% common ownership between the cooperating companies, rather than the 100% ownership condition at issue in the Danish case.

As a general rule, a national tax system, including Norway's VAT rules, falls outside the scope of the EEA Agreement, and Norwegian VAT grouping legislation is accordingly not required to conform to the VAT Directive.

For these reasons, the General Court's Sampension ruling on the Danish 100 % ownership condition under article 11 of the VAT Directive has no direct legal bearing on Norwegian practice, and Norwegian companies cannot invoke it, or article 11 more generally, to challenge the Norwegian ownership or cooperation requirements for VAT grouping. 

As opposed to what is the case in Denmark, the Swedish VAT Act (2023:200), which implements the VAT Directive, does not contain a specified threshold regarding ownership that is required to deem the involved companies financially closely bound to each other.

The relevant section of the Swedish VAT Act, Chapter 4 section 10, is in this instance the same as the relevant wording of article 11 of the Directive. It is therefore difficult to see that the ruling will have any impact on VAT groups in Sweden. In this context, it should be added that the Swedish VAT Act allows two types of VAT groupings. One is in the financial sector: the VAT group may contain companies which are under the supervision of the SFSA and companies whose main business is to supply such companies with goods and services. The other concerns companies which have formed a specific type of commissionaire structure for income tax purposes. This structure is very different from, and should not be confused with, civil law commissionaire arrangements.