Fiscal unity VAT in Germany: judgement of ECJ

A fiscal unity for VAT purposes pursuant to § 2 para. 2 no. 2 sentence 1 UStG (“German VAT act”) exists if a legal entity is financially, economically and organizationally integrated into the company of the controlling company according to the overall picture of the actual circumstances.

The financial integration of a legal entity is understood to be the ownership of the majority of shares in the controlled company. Economic integration means that the controlled company has a close economic connection with the company as a whole. Organizational integration requires that the possibility of control of the subsidiary by the parent company associated with financial integration is actually exercised in the day-to-day management. The controlling company must de facto control the controlled company through the manner in which it manages the company and enforce its will in the controlled company.

The fiscal unity has the effect that non-taxable internal services are rendered between the parts of the company located in Germany.

A fiscal unity for VAT purposes is often undesirable because it does not bring any advantages for companies entitled to deduct input tax and makes the controlling company the tax debtor for the entire fiscal unity. This may impose a high risk on him. A further risk can arise from the fact that the VAT fiscal unity is not recognized in practice and thus invoices with VAT are issued which refer to purely internal sales. This leads to the fact that although the VAT of the issuing tax group company is owed, the tax group parent is not entitled to deduct input tax.

According to case law and administrative opinion, any company can be the controlling company, regardless of whether it is a partnership or a corporation.

However, according to the German view, the controlled company must be a corporation.

The ECJ does not follow the argumentation that the existence of the integration characteristics cannot be determined with legal certainty in the case of partnerships, since changes to the voting rights could also be agreed orally.

Also according to Art. 11 (2) VAT Directive, the legal form restriction for controlled companies is not to be regarded as a necessary measure to avoid tax evasion and avoidance.

The ECJ found that the general exclusion of partnerships as controlled companies is disproportionate and constitutes a violation of the principle of neutrality.

Accordingly, the ECJ ruled in its judgment of 15.4.2021 that the legal form restriction for controlled companies is contrary to Union law. 

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