VAT Exemption: the CJEU Starts Its Clarification Work

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Armelle Abadie Elisabeth Ashworth

Armelle Abadie and Elisabeth Ashworth, CMS Bureau Francis Lefebvre, France

Armelle Abadie is Attorney-at-law and Elisabeth Ashworth is Attorney-at-law, Partner, with CMS Bureau Francis Lefebvre, France

In four cases recently referred to it, the Court of Justice of the European Union was asked to clarify the legal rules applicable to independent groups of persons. While the clarity is welcome, the Court's decisions might increase the cost of certain services which are currently VAT-free.

In four cases referred to the Court of Justice of the European Union (“CJEU”) (case C-274/15 Commission v. Luxembourg, case C-605/15 Aviva, case C-326/15 DNB Banka and case C-616/15 Commission v. Germany), the Court was asked to clarify the legal rules applicable to independent groups of persons (“IGP”s). The Court's decisions might restrict the scope of this regime and increase the cost of certain services whose consumption is VAT-free.


In the system applied by the European Union (“EU”), certain supplies of services are exempt from value added tax (“VAT”), in particular as regards activities carried out in the public interest (health, education, social welfare, housing, sports, etc.), as well as banking, financial and insurance services. Because of such exemption, consumers of the said services do not, in principle, pay any VAT. However, as no VAT is paid, operators may not recover the VAT levied on the costs borne by them in order to carry out the activities concerned. The price of the service supplied to the end consumer may thus include a “hidden” VAT.

Among the means that make it possible to limit the “hidden” VAT eventually borne by consumers, it is necessary to mention the special exemption regime applicable to IGPs, under Article 132 (1) (f) of Directive 2006/112/EEC (“the Directive”). Pursuant to the said provision, suppliers of VAT-exempt services may share expenses (such as IT systems or high-tech equipment), without any re-charging of the costs shared among the members of the grouping giving rise to the application of VAT.

Such exemption mechanism is applicable under certain conditions related to the legal capacity of the members (who must carry on an activity exempt from VAT or in respect of which they are not taxable persons), the nature of the services supplied by the group (which must be directly necessary for the exercise of the members' activity), and the price of the services supplied (the grouping may only claim from its members the exact reimbursement of their share of the joint expenses). Finally, the exemption may not create any risk of competitive distortion.

Once these four pending cases have been settled, the CJEU will have clarified each of the above conditions and the legal effect of the exemption, thus allowing for its harmonized application in all Member States of the EU.

However, on the basis of the first information available that might support our analysis, the interpretative work carried out by the Court might lead to a significant restriction of such exemption as currently applied by Member States.

First Conclusions

In a first judgment entered on May 4, 2017 (C-274/15), the CJEU completed a first stage of this process by ruling on the following matters.

While it is not necessary for the members of a group to exclusively carry on non-taxable activities, the services supplied by the group shall be exempt only insofar as such services are directly necessary for the said members' tax-exempt activities. In other words, the exemption does not apply to costs contributing to the completion of taxable activities carried out by the members. The Court also held that (i) a member of a group may not recover the VAT levied on an expenditure used by the group; and (ii) the exemption does not extend to services that one of the members supplies to the group, which subsequently allocates the cost thereof among all participants.

These first clarifications already bar the practice that had been admitted—not only in Luxembourg, against which the Court entered its decision—but also in other Member States that allowed similar schemes under this provision.

Other Clarifications are Anticipated

The other issues to be adjudicated in the three other cases will also be essential for the future of this regime.

The most sensitive issue concerns the activities in respect of which reliance on the cost-sharing mechanism under a VAT exemption scheme is authorized. However, the two Advocates General instructed to review the pending cases have, in this respect, issued divergent opinions.

On the one hand, AG Kokott contends that banking, financial and insurance activities are excluded from this exemption. In her view, the exemption of IGPs only benefits activities pursued in the public interest, as this provision is contained in an article of the Directive entitled “Exemptions for certain activities in the public interest.”

Conversely, AG Wathelet contends that the Directive's preparatory work, and the intention of its authors, demonstrate that the exemption of the services supplied by IGPs applies regardless of the nature of the activity pursued by their members, provided that such activities are VAT-exempt or are not taxable. Tax-exempt banking, financial and insurance services might thus benefit from this rule, as is the case in the very large majority of Member States of the EU.

The CJEU must now settle this issue, which is crucial for the banking, financial and insurance sectors, that —this must be emphasized—did not expect that such exemption might be called into question.

The CJEU will also rule on the legal status of groups having no legal personality and on the territorial scope of IGPs. In her opinion concerning these issues, AG Kokott considers that the exemption may only benefit those of the group's members that are established in the same Member State. Here also, this would materially restrict the application of the exemption, as admitted by certain Member States of the EU.

Next Steps

Once all of these issues have been settled by the CJEU (the remaining three judgments will only be entered several months from now), Member States will have no option but to adapt their domestic regulations to the Court's interpretation that is binding on them, unless they unanimously agree to amend the Directive, which is not very likely in the short term.

Tax authorities of those Member States that currently apply the rules governing IGPs in a manner less restrictive than that mandated by the CJEU might be prompted, if such is not already the case (e.g., in France or Luxembourg), to enable their operators to apply the VAT group regime provided for in Article 11 of the Directive, which is an optional regime for Member States.

Under this regime, independent entities belonging to an economic group may be deemed one single taxable person. VAT only applies to transactions carried out with third parties not belonging to the group. Transactions among group members are treated as internal transactions having no VAT impact.

While the VAT group regime does not replace the regime applicable to IGPs (the members of a group must be closely bound to one another by financial, economic and organizational links, which is not the case for IGPs), the VAT group regime might prove a valuable tool in order to mitigate the residual VAT burden introduced by shared costs.

Armelle Abadie is Attorney-at-law and Elisabeth Ashworth is Attorney-at-law, Partner, with CMS Bureau Francis Lefebvre, France.The authors may be contacted at:;

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