VAT grouping scheme restricted to legal entities
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This article explores Latvian VAT grouping rules for consistency with relevant case law of the Court of Justice of the European Union (CJEU).
CJEU case law
In case C-85/11, the European Commission claimed that Ireland had failed to meet the requirements of the VAT directive by allowing non-taxable persons to join a VAT group. In its ruling of 9 April 2013, the CJEU said the VAT directive does not keep non-taxable persons out of the VAT grouping scheme.
Joined CJEU cases C-108/14 and C-109/14 (Larentia + Minerva) involved a dispute over whether the restriction that (1) a VAT group may be formed only by legal entities and not partnerships and that (2) such persons must be subordinated to the main company of the VAT group is consistent with the VAT directive. In its ruling of 16 July 2015, the CJEU said the VAT directive prevents member states from restricting the VAT grouping scheme to legal entities and to persons subordinated to the main company of the group, except for cases where both requirements are necessary for preventing abuse, fraud or tax evasion.
The Latvian VAT Act
The Latvian VAT Act provides that a VAT group may be formed by –
VAT-registered companies within one group of companies under the Company Groups Act;
the VAT-registered branch of a foreign legal entity in Latvia if that entity is within the same group of companies that includes the other members of the VAT group under the Company Groups Act.
So Latvia prevents persons that are not legal entities from joining a VAT group, except for a foreign entity’s branch. In other words, individuals that carry on a trade and partnerships are kept out of the VAT grouping scheme.
In the light of the CJEU case law, we feel the Latvian lawmaker should assess whether such VAT grouping rules are consistent with the VAT directive, i.e. whether keeping partnerships (general or limited), individuals, non-taxable persons, municipalities and other persons out of the VAT grouping scheme meets the condition of the VAT directive that member states may adopt restrictions on the VAT grouping scheme only for the purpose of preventing abuse, fraud or tax evasion.
The Finance Ministry’s opinion
The Ministry of Finance says Latvia’s restriction on persons joining a VAT group meets the original purpose and is consistent with CJEU case law.
Rules elsewhere in the EU
The Irish VAT Act does not restrict the VAT grouping scheme to legal entities and allows non-taxable persons to join a VAT group. The main condition is for those persons to be mutually closely linked financially, commercially and organisationally.
The UK is about to enact rules stating that in addition to legal entities, a partnership and an individual may join a VAT group that includes at least one UK-registered legal entity if that individual or partnership exercises control over the other members. In the case of legal entities, too, one entity should be exercising control over the other entities. And the individual or partnership must be either registered or authorised to register for VAT.
The Estonian VAT Act provides that a VAT group may include any commercially and organisationally linked taxable persons registered for Estonian VAT (including an individual and a partnership) if one person holds more than 50% of shares or voting power in the other group members or if the persons are linked by a franchise agreement.
However, while in the case of persons linked by a franchise agreement, neither of them holds shares or voting majority in the other, they qualify as linked financially, commercially and organisationally, i.e. the franchisor has a direct influence on the franchisee’s business.
Benefits from joining a VAT group
One of these benefits is improved cash flows since transactions between members of the VAT group escape VAT. This also eases the administrative burden with a single VAT return covering the entire group.
We look forward to hearing from you if you are keen to use the VAT grouping scheme but do not qualify under the VAT Act. Our professionals will be happy to help you.