CJEU decides against independent group of persons in DNB Bank case
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We continue informing MindLink subscribers about DNB Bank case C-326/15 regarding an independent group of persons (IGOP) heard by the Court of Justice of the European Union (CJEU). On 21 September 2017, the CJEU made a decision that ended the existence of IGOP in the banking and insurance sector by stating that the IGOP rule is no longer applicable in those industries. This article explores the rationale behind the decision as well as the CJEU considerations and recommendations to the tax authorities of member states that had permitted the formation of IGOP contrary to this decision.
The CJEU mainly analysed whether the IGOP concept can be applied to the banking sector. Neither the EU Committee, who issued IGOP guidance, nor any of the member states having recognised IGOP had doubted that IGOP was applicable without restriction before the case was heard by the CJEU. So IGOP could be applied to any person that makes exempt transactions under section 52(3.2) of the Latvian VAT Act.
The Administrative District Court of Latvia had asked the CJEU questions about the facts and circumstances of the case, without questioning the applicability of IGOP to the financial sector.
The CJEU mainly analysed the applicability of Article 132(1)(f) of the VAT directive (the “IGOP rule”) depending on activities carried out by the taxable person. The CJEU finds that the IGOP rule applies only to transactions eligible for an exemption under Article 132, not Article 135. Since financial services are eligible under Article 135, the IGOP rule does not apply to groups supplying financial services.
In view of this, the CJEU considers it unnecessary to answer the six questions asked by the Latvian court about the facts and circumstances of the case.
Implications for periods before the decision
According to the CJEU, with respect to any tax periods that have already ended, a member state’s tax authorities cannot enforce this decision against taxable persons that applied the IGOP rule in the insurance or financial services sector before the decision was made, where such application was permitted by the national law.
On the other hand, with respect to any tax periods that have not yet ended, the tax authorities cannot refer to the applicability of Article 132(1)(f) of the VAT directive as interpreted by this decision to deny an exemption on services supplied by an IGOP consisting of entities such as credit institutions.
Implications for the Latvian VAT Act
Following the CJEU decision, Latvia is required to revise the relevant provisions of the VAT Act, i.e. section 52(3.2). There is an ongoing debate in other member states that had passed the IGOP rule into their national law. Unlike Latvia, however, many member states (including Lithuania and Estonia) had not incorporated a detailed IGOP rule into their national law but had adopted the general rule of the VAT directive. So those member states should change their practice of application, while Latvia should amend its law. The Ministry of Finance is working on an assessment of those provisions and is expected to inform taxable persons about Latvia’s next steps soon.