Table of Contents
- I. The Concept of Cost-Sharing Groups
- II. Applying the Cost-Sharing Exemption
- III. Cross-Border Application
- IV. Conclusion
On May 4 the Court of Justice of the European Union released an important judgment in Commission v. Luxembourg , C-274/15 (CJEU 2017), regarding the cost-sharing exemption in article 132(1)(f) of the EU VAT directive (2006/112/EC). The decision largely upholds the October 2016 opinion of Advocate General (AG) Juliane Kokott.
According to the Court, several of Luxembourg’s practices are incompatible with the VAT directive. First, the Luxembourg VAT exemption applies to services provided by a cost-sharing group even when those services are used for members’ taxable activities. Therefore, it could include services, such as overheads, that are not directly necessary for the exempt or nontaxable activities of the members. Second, Luxembourg’s VAT legislation allows goods and services previously acquired in the members’ own name but on behalf of the cost-sharing group and subsequently recharged by the members to the group to be regarded as being outside the scope of VAT. That is contrary to the VAT directive because the cost-sharing group is a taxable person in its own right and separate from its members; therefore, any transactions between the members and the cost-sharing group fall within the scope of VAT.
The judgment is the first of four cases before the CJEU regarding the same VAT provision. The other pending cases are DNB Banka AS v. Latvia, C-326/15; Aviva Poland v. Aviva Towarzystwo Ubezpieczen na Zycie SA w. Warszawie, C-605/15; and Commission v. Germany, C-616/15.
In her opinions in DNB Banka and Aviva , AG Kokott said the exemption encompasses only supplies to members with activities in the public interest, thereby excluding financial services. She also affirmed that the cost-sharing exemption cannot be applied in cross-border situations. In Commission v. Germany, AG Melchior Wathelet took the opposite view, saying the exemption should be applied to exempt activities beyond those in the public interest.
CJEU decisions in those three cases are expected later this year and will be important in defining the scope of the cost-sharing exemption.
I. The Concept of Cost-Sharing Groups
The VAT exemption for the services of cost-sharing groups has an obscure legal history.1 It first appeared in the proposal for the Sixth Directive in 1973,2 which introduced an exemption for medical or similar services supplied by independent professional groups to their members for exempt activities.
The final version of the exemption (transferred to article 132(1)(f) of the current VAT directive) has a wider scope. It is no longer restricted to independent professional groups in the medical sector and covers services rendered in other exempt and even nontaxable sectors.3 It requires member states to exempt from VAT:
the supply of services by independent group of persons, who are carrying on an activity which is exempt from VAT or in relation to which they are not taxable persons, for the purpose of rendering their members the services directly necessary for the exercise of that activity, where those groups merely claim from their members the exact reimbursement of their share in the joint expenses, provided that such exemption is not likely to cause distortion of competition.
Basically, the purpose of the cost-sharing exemption is to allow economic operators to pool services whose main benefit consists of putting people on a common payroll4 and redistribute the costs for those VAT-exempt services from the group to its members. Consequently, the members can achieve economies of scale, ensuring a level playing field with larger competitors that have the capacity to perform the same activities internally.5
From a VAT perspective, the services supplied under the exemption for cost-sharing arrangements are treated like in-house services.6 In other words, the ratio legis of the exemption is to limit the distortive effects that exemptions without the right to deduct usually create.7
The CJEU has said the purpose of the exemption is to avoid requiring an entity that offers specific services to pay tax “when it has found it necessary to cooperate with other entities by means of a common structure set up to undertake activities essential to the provision of those services.”8
Despite the changes since its initial proposal, the exemption is still ambiguous and gives member states substantial interpretive leeway. Discrepancies in how they apply the exemption go against the objective of a harmonized application of the EU VAT system in the single market.9
The European Commission is aware of those difficulties and has been working since 2004 to shed some light on the interpretation of article 132(1)(f) of the VAT directive.10 Its working papers are not binding but provide useful guidance.
In 2007 the commission released two legislative proposals to amend the EU VAT treatment of financial and insurance services.11 Those proposals contained a cost-sharing exemption intended especially for the insurance and banking sectors that would ensure consistent application in all member states. Although much hope was placed on the proposals, the commission did not really assess their economic impact and, for various reasons, got little political support from the banking and insurance sectors and investment funds.12 After a few years, it appeared member states did not want to adopt the proposals, making their entry into force more and more unlikely13 and any reference to them increasingly irrelevant.14 The European Commission decided to withdraw the proposals in March 2016,15and no revision of article 132(1)(f) of the VAT directive is expected.
Only three cases on article 132(1)(f) of the VAT directive have been referred to the CJEU.16 In Stichting Uitvoering Financiële Acties (SUFA) v. Staatssecretaris van Financiën, C-348/87 (CJEU 1989), the Court said the exemption did not apply to supplies from one foundation exclusively to another because the membership condition of the cost-sharing group was not met. In Assurandør-Societetet, acting on behalf of Taksatorringen v. Skatteministeriet, C-8/01 (CJEU 2003), the CJEU ruled that the exemption must be refused if there is a genuine risk that the exemption may by itself, immediately or in the future, give rise to distortion of competition. And in Stichting Centraal Begeleidingsorgaan voor de Intercollegiale Toetsing (SCBIT), C-407/07 (CJEU 2008), the Court said the cost-sharing exemption does not require the services to be offered to all members of the cost-sharing group because members may have different activities and needs.
II. Applying the Cost-Sharing Exemption
Several conditions must be met for the article 132(1)(f) exemption to apply.
A. Independent Group
The first condition regarding the status and characteristics of an independent group — that is, a cost-sharing group — raises two questions:
must the group be regarded as an entity separate from its members; and
must the group have a particular form or shape for other legal entities to be a member?
Regarding the first question, the CJEU has provided a clear answer, saying an independent group of persons (IGP) is:
a taxable person in its own right, separate from its members. It is clear from the very wording of that provision that the IGP is independent, and that it therefore carries out its supplies of services independently, within the meaning of Article 9 of [the VAT directive]. Furthermore, if the services supplied by the IGP were not services supplied by a taxable person acting as such, those services would not be subject to VAT. Those services would therefore not be capable of forming the subject matter of an exemption.17
The CJEU’s position is far from convincing because it cannot be inferred from the wording of article 132(1)(f) of the VAT directive that the cost-sharing group must be a separate (legal) entity from its members — it merely suggests the existence of a group of collaborating persons.18 For that purpose, it should be sufficient to set up a cost-sharing group using contractual arrangements that would set out the rules of the cost sharing.
The Court seems to associate the word “independently” in article 9(1) of the VAT directive with the term “independent group” in article 132(1)(f). The first relates to the definition of a taxable person, which is any person who independently carries out any economic activity anywhere, whatever the purpose or results of that activity. Therefore, for a transaction to be liable for VAT, a person must act independently and not as a subordinate (for example, an employee acting on behalf of an employer).19
The concept in article 132(1)(f) relates to an independent group of persons that decides to collaborate to share costs. It can be argued that the term “independence” in this context does not relate to the independence of any separate (legal) entity from its members but to the independence of the group as a whole from third parties.20 In other words, the cost-sharing group includes its members, but that does not necessarily mean the members must be distinguished from the group itself. The group of entities that collaborates based on an agreement could appoint one of the signatories administrator, thus making one party responsible for purchasing and redistributing costs on behalf of the entire group.21Wathelet has suggested that an IGP should not necessarily be a taxable person, saying it is immaterial whether it is because the provision in the VAT directive does not lay down any requirement regarding taxable status.22
Further, the separate entity concept of cost sharing raises the question whether a head office can be regarded as a cost-sharing group for its permanent establishments or branches. If one relies on Commission v. Luxembourg, a cost-sharing group must necessarily be an entity — that is, a taxable person — separate from its members so that a head office cannot be a cost-sharing group because it is not separate from its PEs.23 The European Commission shares that view and — perhaps surprisingly — assumes a cost-sharing group is by definition a separate entity from its members.24
Although the question might at first sound irrelevant given that services between a head office and its PEs are outside the scope of VAT, it may be of interest when the head office or PE is a member of a VAT group. In that case, cross-border supplies of services might be liable for VAT in the country where the VAT group is located.
Under Skandia America Corp. (USA), filial Sverige v. Skatteverket , C-7/13 (CJEU 2014), a landmark decision, the supply of services from a U.S. head office to its Swedish branch constitutes taxable transactions when the branch belongs to a VAT group. Therefore, setting up a cost-sharing group could be a way to mitigate VAT costs for financial institutions with limited or no right to input tax recovery. It could be argued that the head office and the branch are no longer part of the same legal entity because of the existence of the VAT group, so that the head office would be regarded as a separate entity from its branch. However, that scenario presupposes that the combination VAT group and cost-sharing group is feasible, and that all conditions are met for both structures to exist.25
On the second question, the CJEU did not confirm in Commission v. Luxembourg whether the cost-sharing group as a separate entity must have any particular (legal) form. However, Kokott has pointed out that an IGP does not have to be a legal person because a separate legal personality is not a requirement for accepting the existence of a taxable person under article 9(1) of the VAT directive.26 I agree with her. For instance, a mere de facto association should suffice to meet the IGP criterion.
B. Activities Carried Out by Members
This condition requires that the members of the cost-sharing group perform either VAT-exempt activities or activities for which they are not taxable persons. Questions arise whether:
the cost-sharing group can be composed of members with taxable activities; and
members can perform any activity, or if activity should be limited to a specific category of services (for example, insurance and financial services).
Regarding the first question, the wording of article 132(1)(f) of the VAT directive does not necessarily preclude members that provide taxable activities in addition to the required exempt or nontaxable activities, which the CJEU confirmed in Luxembourg.
Member states usually allow members of a cost-sharing group to perform some amount of taxable activities. For instance, in Luxembourg, services to members are exempt from VAT under the cost-sharing exemption if the members’ taxable activities do not exceed 30 percent of their annual turnover. In Belgium, members that carry out primarily — that is, more than 50 percent — exempt or nontaxable activities can be members of the cost-sharing group.27 The U.K. sets the limit at 15 percent, and France at 20 percent.28
The European Commission has indicated that interpretations like those could trigger abuse because members might be tempted to use the exempt services provided by the cost-sharing group for any taxable activities members provide on top of their exempt or nontaxable activities.29
Kokott addresses the second question in her opinion in Aviva, saying the cost-sharing exemption can encompass supplies only to members with activities in the public interest and not to members of the financial and insurance sectors. She bases her conclusion on the limited scope of the cost-sharing exemption, the exemption’s drafting history and location in the VAT directive, and the CJEU’s schematic approach in TMD Gesellschaft für transfusionsmedizinische Dienste mbH v. Germany , C-412/15 (CJEU 2016). She also references the failed European Commission proposals to amend the finance and insurance exemptions.
I find that interpretation surprising for several reasons. First, when the proposals were released, the cost-sharing exemption was indeed touched on but only because it had not been implemented consistently by the member states that had adopted it. That is a long way from saying the exemption did not cover finance and insurance services when originally drafted, however. The primary purpose of the cost-sharing exemption is to remove a competitive disadvantage for smaller companies, and it does not in itself exclude a specific category of services, such the finance and insurance sector.
Second, well-respected commentaries on the VAT directive (such as Ben Terra) and European Commission working papers all seem to agree that the exemption is open to anyone whose activities are exempt or who is not a taxable person.30
Third, TMD revolved around whether the supply of plasma, as a component of blood, fell under the public-interest exemption for the supply of human organs, blood, and milk. The CJEU concluded that industrial use was not exempt because it had no connection to healthcare, so exempting it would have been contrary to the purpose of the exemption. Public interest played a role only because plasma is not included in the article 132(1)(d) exemption, which does exempt the supply of human blood. That situation is not comparable to the cost-sharing exemption; there is no reason to account for public interest because the wording of the legal cost-sharing provision is clear.31
Fourth, it is difficult to see TMD as demonstrating that the headings in the VAT directive restrict the scope of the main articles, especially because the Court has said the public-interest heading does not “of itself entail restrictions on the possibilities of the exemption.”32
Finally, one observer has rightly pointed out that excluding finanical and insurance services from the cost-sharing exemption would imply that the CJEU had “turned a blind eye to a crucial aspect of the exemption, which is rather unlikely” in Taksatorringen, which involved insurers.33 I agree with that opinion and believe the CJEU should have simply said the question about distortion of competition was irrelevant, given that insurance services were not covered by the exemption.
Wathelet also addressed the material scope of the cost-sharing exemption in his opinion in Commission v. Germany. The European Commission has brought infraction proceedings against Germany because it limits the cost-sharing exemption to supplies for members that are doctors or exercise paramedical professionals or that carry on exempt activities in the hospital and medical-care sector. Germany’s position is based on the wording, position, drafting history, and objectives of the cost-sharing exemption.
AG Wathelet uses a schematic, teleological, and textual approach in interpreting the cost-sharing exemption, and disagrees with Germany. He believes the purpose of the exemption is to avoid members of a cost-sharing group having to pay irrecoverable VAT on services supplied by the group, and that the exemption applies to any exempt or nonbusiness activity of the members. Perhaps rightly, he underscores that nothing in the wording of article 132(1)(f) of the VAT directive suggests the cost-sharing exemption should be restricted. In accordance with Hoffmann, he affirms that the public-interest heading of article 132 of the VAT directive should not of itself limit the scope of the cost-sharing exemption to items in the public interest. He adds that the position of the exemption in the VAT directive is the result of nothing more than careless drafting.
The opposing AG views in Aviva and Commission v. Germany on whether the cost-sharing exemption applies to insurance and financial services points out the obvious difficulties in trying to understand the exemption’s scope.34 Upholding Kokott’s view would affect the entire insurance and financial sector and require some member states to completely revise their VAT legislation. That would lead to fundamental problems in most of the member states, given that 20 apply the cost-sharing exemption to financial services.35
C. Directly Necessary Services
The third condition is that the services supplied by the cost-sharing group must be directly necessary for the exercise of the members’ exempt or nontaxable downstream activities. After SCBIT, it seems clear that the needs of members may differ and that therefore the services provided by the cost-sharing group to the members may also differ.36
However, there was little agreement about what the term “directly necessary” meant until Commission v. Luxembourg. In the European Commission’s view, the Luxembourg VAT legislation on cost-sharing groups was not compliant with article 132(1)(f) of the VAT directive because it allowed members with taxable turnover to benefit from exempt services. The commission believes direct necessity should be construed strictly, meaning that only services specifically related to the downstream activity of a member — as opposed to overhead — and that constitute an indispensable input satisfy the criterion.37
The CJEU upheld that view in Commission v. Luxembourg, saying:
The services rendered by an IGP whose members also carry out taxable activities may qualify for that exemption, but only in so far as those services are directly necessary for those members’ exempt activities or activities in relation to which they are not taxable persons. . . . The services supplied by an IGP to its members do not necessarily relate to their general costs and thus to the totality of their activities.
Following Kokott’s opinion, the Court seems to have applied an exclusivity test: Costs must be directly necessary for the exempt or nontaxable activities of the members, while no costs should be able to be allocated to any taxable activity of the members.38 In practice, that excludes overhead that is per se not attributable to a specific sector of activity.
Therefore, unless overhead is exclusively linked to members’ exempt or nontaxable activities, it likely will not qualify for the exemption.39 I think that severely curtails and endangers the cost-sharing exemption, especially for insurance companies and financial institutions, for which overhead is usually an important part of costs. In France, for instance, where the VAT group is not implemented in domestic VAT legislation as an alternative vehicle to optimize VAT costs, many banks and insurance companies rely on the cost-sharing exemption. If followed by the French tax authorities, Luxembourg is likely to require taxpayers to revise their structures to avoid a dramatic rise in VAT costs.40
The decision also leads to another, perhaps more practical, difficulty. According to the Court, Luxembourg has not shown why it “might be excessively difficult for the IGP to invoice for its services excluding VAT, according to the share of its members’ activities in their totality represented by the activities which are exempt from the tax or in relation to which they are not taxable persons.” From that language, it could be inferred that the cost-sharing group might be able to apportion supplies to mixed-use members — that is, taxable and exempt or nontaxable. For instance, if 70 percent of a member’s activities are exempt, that member’s charge by the cost-sharing group should be 70 percent exempt.
That result is questionable from a VAT perspective because it links the level of exemption on inputs to the level of exempt outputs of the members and could lead to artificial splitting arrangements of services. A cost-sharing group would exempt supplies of overhead services to a wholly exempt sector of a member and would charge VAT on a separate supply of the same service to the taxable sector.
D. Reimbursement of Joint Expenses
Each member of the cost-sharing group must reimburse members only for their shares of the joint expenses for the provision of services at stake. That amount should include the VAT the group pays on purchases it makes to provide services to its members.41 The VAT should not be regarded as a profit but rather as a cost split between members.42
However, a difficulty arises regarding the assessment of this condition when the services provided by the cost-sharing group to its members must include a profit for transfer pricing purposes. Under transfer pricing rules of the member state where the cost-sharing group is established, the group might have to apply an uplift (for example, cost plus for value-added services). Kokott has said that kind of uplift fails to satisfy the criterion in article 132(1)(f) of the VAT directive, under which the group merely claims from its members exact reimbursement of their share of the joint expenses.43 In other words, when transfer pricing rules require an uplift, this condition is not met.
I do not agree with Kokott’s literal interpretation of the condition “exact reimbursement of joint expenses.” First, it is important to distinguish VAT and transfer pricing rules as two separate systems governed by different principles and rationales and having different purposes.44 VAT regimes are meant to tax transactions in one jurisdiction, whereas transfer pricing systems are intended to correctly allocate profits and losses of multinational companies according to the functions of and risks assumed by different entities.45
The CJEU has called the OECD model convention on that point “irrelevant” because it concerns direct taxation, whereas VAT is an indirect tax.46 It is therefore surprising that Kokott relies on a VAT condition to exclude transactions from the benefit of the exemption for which an uplift is legally required for direct tax purposes. A transfer pricing adjustment mandated by law may arguably not be consideration in the true sense of VAT.47
Second, even though VAT and transfer pricing rules follow different approaches, there is some overlap. However, that overlap mainly has consequences for the taxable amount for VAT purposes (VAT adjustments rarely have transfer pricing consequences) when there is a direct and immediate link between the transfer pricing adjustment and the initial supply of goods or services, which must be evidenced case by case. A recent working paper by the European Commission on possible VAT implications of transfer pricing considers those topics in more detail.48
In some countries, pricing or repricing transactions under direct tax transfer pricing rules do not preclude use of the exemption. Upholding Kokott’s opinion could diminish the applicability of the exemption in intracorporate group situations.
E. Distortion of Competition
The fifth condition is that the exemption of supplies from VAT must not be likely to cause distortion of competition. Little is known about the exact meaning of this condition.
In Taksatorringen, the CJEU said the VAT exemption in itself must not give rise to distortion of competition in a market in which competition will be affected by the presence of an operator that provides services for its members and is prohibited from seeking profits. It said it is the fact that the provision of services by a group is exempt, and not that the group satisfies the other conditions of the provision, that “must be liable to give rise to distortion of competition” for the exemption to be refused. Further, the Court ruled that there must be a real and not purely hypothetical risk of distortion of competition caused by applying the exemption, whether immediately or in the future.
In her opinion in Aviva, Kokott concludes that the distortion of competition condition should be read in conjunction with article 131 of the VAT directive, which tries to prevent abuse. According to Kokott, appropriate use of the cost-sharing exemption should not lead to distortion of competition because the exemption is meant to remove a competitive disadvantage for small businesses that lack in-house resources to provide the services or the ability to source services without VAT from group members.
However, instead of providing specific criteria to assess whether the application of the cost-sharing exemption would distort competition, Kokott gives three examples that cross the line, making the exemption inappropriate. First, she points out that cost-sharing groups providing services to nonmembers leverage their synergies to compete in the wider market, which could constitute a correspondingly genuine risk of distortion of competition.
Second, Kokott discusses a situation in which the primary purpose of setting up the cost-sharing group is to optimize the input VAT burden rather than establish the conditions for reciprocal cooperation. This is a critical point: If creating a cost-sharing group is commercially viable, what is to prevent a taxpayer from choosing the option if it results in a lower incidence of VAT, despite it being the primary purpose?49
In her third example, Kokott suggests that not tailoring the services of the cost-sharing group to the specific needs of its members could indicate that the group would distort competition, because the members would not have needed to cooperate to obtain those services.
Kokott seems to follow a case-by-case approach: If the way the cost-sharing exemption is applied is inappropriate because, for instance, services are not tailored to the specific needs of the members, then there is a risk that the cost-sharing group could cause distortion of competition. That approach, in line with Taksatorringen, seems to limit the condition of distortion of competition to the characteristics of the cost-sharing group and its supplies — that is, a group must limit its customer base to its members, rather than the conditions of the market in which the group operates.
III. Cross-Border Application
Aviva raises another fundamental question: Does the cost-sharing exemption also cover services supplied by cross-border groups to members established in other member states or third countries? That question also arises when the group itself is established in a third country.
In Aviva, Kokott concludes that a cross-border use of the cost-sharing exemption is unacceptable — the exemption covers only the services a group supplies to members in the same member state. She finds support for her interpretation in:
the territorial heading of the old Sixth Directive location of the exemption;
the need for consistency with the VAT grouping provision;
the need to facilitate each member state’s assessment of the distortion of competition position by confining it to their national markets;
the absence of infringement to the fundamental freedoms; and
the need to prevent nontaxation resulting from the use of non-European cost-sharing groups.
At first glance, those arguments appear laudable. I believe, however, that such a strict interpretation of article 132(1)(f) is not compatible with the VAT directive nor with primary European law and the freedom to provide services in article 56 of the Treaty on the Functioning of the European Union.
First, as the European Commission has emphasized, there is no basis in the wording of article 132(1)(f) of the VAT directive for the exemption for cost-sharing groups to be limited to domestic transactions.50
Other provisions in the VAT directive, such as article 11 on VAT grouping, restrict the VAT group’s application to a member state’s territory. Kokott has referred to the historical drafting of the cost-sharing exemption, stating that the provision applied to “exemptions within the territory of the country.” That heading disappeared when the VAT directive replaced the Sixth Directive, but no material change of the exemption itself was intended, according to Kokott.
Kokott’s argument is unsound. As mentioned, the heading of article 132 of the VAT directive should not be determinant. Further, the question raised in Aviva relates to the interpretation of the current version of the VAT directive, so it is strange to refer to the previous version as a justification. Kokott’s argument would also imply that exemptions are withheld for all cross-border services, including some activities in the public interest but also those exemptions listed in articles 135 to 137 of the VAT directive.51
Second, despite the territorial wording, it is clear that not all member states consider VAT groups to be limited to their borders.52 The U.K., for instance, allows overseas establishments of U.K. VAT group members to be included in the U.K. VAT group, unless prevented by the way the member state where the overseas establishment is located has implemented Skandia.53 Part of the delay in formulating a European-wide response to that case arises from member states’ differing approaches, making it unclear whether one can align the cost-sharing exemption with any consistent view of VAT grouping.54
One can question whether the cost-sharing group and the VAT group vehicles are comparable. I think they are critically different. The VAT group provision is optional, so it probably makes more sense to restrict it to one member state’s territory.55 The Confédération Fiscale Européenne has pointed out that the VAT grouping provision in the VAT directive makes it optional for states to recognize those groupings, which reflects the Community VAT system’s gradual harmonization via national laws. Harmonization is only partial, however, and the cost-sharing exemption is a more tightly focused provision that is not said to be optional and is clearly intended to have a harmonized application.56Therefore, a comparison to VAT grouping seems unconvincing.
Third, on the grounds of distortion of competition — that is, a way to fight tax abuse — Kokott has argued that the exemption should be confined to a single member state. Her interpretation raises several concerns. First, under article 131 of the VAT directive, member states are entitled to establish specific measures for “ensuring the correct and straightforward application of those exemptions and of preventing any possible evasion, avoidance or abuse.” Therefore, that provision — and not the distortion of competition condition itself — should be used to tackle abuse in cross-border scenarios. Further, the measure must not exceed the limits strictly necessary for achieving its goal; in particular, it cannot be of a general nature, such as the prohibition of cross-border activities.57 Thus, in compliance with the fundamental European principle of proportionality, measures imposing financial charges on economic operators are lawful only if appropriate and necessary for meeting the objectives legitimately pursued by the legislation in question.
It would therefore be unfortunate if a different approach were adopted in the context of cost sharing that would prevent the exemption from applying across borders even when there is no distortion of competition.58 That notion is strengthened by Taksatorringen, which said the risk of distortion cannot be hypothetical.
Also, I do not agree with Kokott’s argument in Aviva that “now, the tax authorities are even less able to carry out a cross-border evaluation of the existence of distortions of competition obtaining in different member states (or even internationally) than they are to assess several local markets in their own country.” There are no apparent underlying data to support that statement.
Kokott further rejects the relevance of the European mutual assistance system as a tool to tackle abuse, especially for third countries. In that regard, article 1 of the European regulations on administrative cooperation on VAT:
Lays down rules and procedures to enable the competent authorities of the member states to cooperate and to exchange with each other any information that may help to effect a correct assessment of VAT, monitor the correct application of VAT, particularly on intra-Community transactions.59
The term “intra-Community transactions” means the intra-Community supply of goods and services.60 Therefore, it is feasible for tax authorities to exchange information and monitor cross-border services within the framework of the cost-sharing exemption. There is no hindrance of those abilities, making restriction disproportionate.
Fourth, any restriction of the exemption for cost-sharing groups in cross-border scenarios (as opposed to domestic ones) appears to conflict with fundamental EU freedoms. For instance, if a U.K. cost-sharing group were allowed to exempt services provided to its U.K. members but a French cost-sharing group were not allowed to provide exempt services to its U.K. members, U.K. members might be encouraged to join the U.K. cost-sharing group instead of the French one, which would likely infringe the freedom to provide services.61
The violation of an EU freedom could be justified by overriding reasons in the public interest. Kokott has failed, however, to make a convincing argument that would justify the restriction of the freedom. She invokes the need to preserve allocation of powers among member states, but that should not be necessary, given that the use of the exemption for cost-sharing groups should not preclude the application of the general place of supply rules in articles 43 to 59a of the VAT directive. Under those rules — and unless there is a lack of uniformity among the member states, which could happen for any cross-border supply of services,62 given the high degree of discretion in implementing the provisions63 — the jurisdiction to tax is well defined.
Kokott also refers to the need to guarantee the effectiveness of fiscal supervision. Again, the use of the EU regulations on VAT administrative cooperation should suffice to address any related risk.64
Finally, is the application of the cost-sharing exemption to a cross-border supply of services involving non-European countries possible? According to Kokott, allowing cross-border structures with non-European countries would facilitate VAT-saving structures. She claims that tax optimization is especially available for groups of companies that operate globally. They would simply have to form, with European affiliates, a cost-sharing group in a country where there is no VAT, purchase services from European providers without VAT, and provide those services under the cost-sharing exemption to its European group members. Kokott is indirectly referring to a “channeling risk,” a well-known phenomenon in VAT grouping optimization structures before Skandia in which, for instance, setting up a VAT group in a member state with a domestic branch of a U.S. head office would allow members to “channel” services from the United States without paying any VAT in the end.65
Fundamentally, two scenarios must be distinguished: Either the member can be established outside the European Union or the cost-sharing group can be located outside the European Union. Consider an example with the United States and France. In the first case, a supply of services by a French cost-sharing group to one of its U.S. members would be deemed to take place in the United States, so that no VAT charge arises. That scenario is risk free, given that services provided to U.S. recipients will never be subject to VAT (even in business-to-consumer situations).66 In the second scenario, a service carried out by a U.S. cost-sharing group to a French member would take place in France. The service would not attract French VAT as long as the conditions for the cost-sharing exemption are satisfied.
The European Commission has said nothing precludes that kind of situation from occurring, although it is uncertain to what extent it could be possible for the French tax authorities (in the example) to assess the requirements in article 132(1)(f) of the VAT directive.67 It appears to be a practical concern rather than a legal one, given that the service would be deemed to take place in France. Therefore, the conditions should be assessed from a French VAT perspective, rather than a U.S. one. But specific elements must be verified, such as whether the French recipient is an actual member of the U.S. cost-sharing group, or whether there is an absence of profit at the U.S. level of the group.68 It is perhaps fair to say that applying the cost-sharing exemption in cross-border situations with non-European countries appears to be more difficult.69 However, nothing in the wording of article 132(1)(f) of the VAT directive suggests that the exemption should not apply to cross-border situations involving non-European countries (or two EU countries). Further, the same questions can be raised for other exemptions under article 135(1) of the VAT directive — there is nothing to prevent companies from being set up in the United States to render services to the EU with similar benefits.70
The cost-sharing exemption raises vital questions regarding the proper extent of the principle of territoriality, as well as the relationship between EU VAT law and the member states’ domestic legal systems and between the VAT directive and other tax regimes.71
The CJEU severely curtailed the availability of the cost-sharing exemption by strictly interpreting the condition of “directly necessary” in Commission v. Luxembourg. In practice, that interpretation excludes overhead that is per se not attributable to a specific sector of activity. Therefore, unless overhead is exclusively linked to members’ exempt or nontaxable activities, it appears it will not qualify for the exemption.
Kokott’s conclusions in Aviva and DNB Banka that the cost-sharing exemption encompasses only services in the public interest and excludes insurance and financial services, and is territorial and not intended to be applied cross border, are surprising. Wathelet has provided an opposing view in Commission v. Germany, supporting a broader interpretation of the exemption that includes insurance and financial services.
Members of cost-sharing groups in the banking and insurance sectors wait expectantly for the CJEU’s judgments in Aviva, DNB Banka, and Commission v. Germany. What should cost-sharing groups that would be harmed by Kokott’s opinions do? Practical steps could include considering the strength of current cost-sharing arrangements and the feasibility of alternative options to achieve or maintain VAT efficiencies.72
It will be key to see what various tax authorities do in response — especially in France and Luxembourg, where the cost-sharing exemption is widely used without a fallback position such as VAT grouping.
1 Joep Swinkels, “The EU VAT Exemption for Cost-Sharing Associations,” Int’l VAT Monitor 13 (Jan./Feb. 2008).
2 Proposal for a Sixth Council Directive on the Harmonisation of Member States Concerning Turnover Taxes — Common System of Value Added Tax: Uniform Basis of Assessment, COM73 (950), June 29, 1973.
3 Swinkels, supra note 1, at 13.
4 Sebastian Kirsch and Philippe Gamito, “L’Exonération TVA des Opérations d’Assurance: Réflexions sur les Diverses Pistes d’Optimisation,“ 3 Bulletin des Assurances 277 (2015).
5 European Commission, “Scope of the Exemption for Cost-Sharing Group Arrangements: A Further Analysis (I),” Working Paper 856, at 3 (May 6, 2015).
7 Nebosja Jovanovic and Madeleine Merkx, “The Cost Sharing Exemption Under Debate — Part I,” 5 Int’l VAT Monitor 326 (Sept./Oct. 2016).
8 Stichting Centraal Begeleidingsorgaan voor de Intercollegiale Toetsing (SCBIT) , C-407/07 (CJEU 2008), para. 37.
9 Jovanovic and Merkx, supra note 7, at 325.
10 European Commission, Working Paper 856, supra note 5; “Exemption of Services Supplied by Independent Group of Persons Whose Activities Are Exempt From or Are Not Subject to VAT,” Working Paper 450 (June 2004); and “Scope of the Exemption for Cost-Sharing Group Arrangements: A Further Analysis (II),” Working Paper 883 (Sept. 30, 2015).
11 COM(2007) 747 final of Nov. 28, 2007; and COM(2007) 746 of Oct. 5, 2007.
12 Christian Amand, “The Limits of the EU VAT Exemption for Financial Services,” 4 Int’l VAT Monitor 273 (July/Aug. 2009).
14 AG Kokott opinion in Poland v. Aspiro SA, formerly BRE Ubezpieczenia sp. z o.o., C-40/15 (CJEU 2015).
15 COM(2015) 610 final of Oct. 27, 2015.
16 Karen Killington and Gamito, “Cost Sharing: All Shook Up?” 1348 Tax J. 17 (2017).
17 Luxembourg, C-274/15 (CJEU 2017), at para. 61.
18 Ine Lejeune, Joost Vermeer, and Simon Cornielje, “VAT and Cost Sharing in the EU,” in VAT and Financial Services 211 (2017).
19 Staatssecretaris van Financiën v. Heerma, C-23/98 (CJEU 2000).
20 Lejeune, Vermeer, and Cornielje, supra note 18, at 211.
22 See his opinion in Commission v. Germany, C-616/15, at para. 82.
23 Ministero dell’Econ. e delle Fin., A’zia delle Ent’e v. FCE Bank PLC , C-210/04 (CJEU 2006).
24 European Commission, supra note 5, at point 3.1.7.
25 For analysis, see id. at points 3.9 and f.
26 See her opinion in DNB Banka, C-326/15, at para. 38.
27 Circulaire AGFisc no. 31/2016 (no. ET127.540), at 6 (Dec. 12, 2016).
28 HM Revenue & Customs Manual CSE3760; and article 261B of the French Tax Code.
29 European Commission, supra note 5, at point 3.2.1.
30 Killington and Gamito, supra note 16, at 18.
31 Redmar Wolf, “The End of Cost Sharing as We Know It?” 3 Int’l VAT Monitor 205 (May/June 2017).
33 Wolf, supra note 31.
34 Killington, “Cost Sharing Exemption: Two AGs Disagree,” 1350 Tax J. 6 (2017).
35 Lejeune, Vermeer, and Cornielje, supra note 18, at 217.
36 Jovanovic and Merkx, supra note 7, at 328.
37 European Commission, supra note 5, at point 3.3.1.
38 Peter Dylewski and Gamito, “Cost Sharing Exemption: The End or the Beginning?” 1335 Tax J. 16 (2017).
40 Armelle Abadie and Helena Vrignaud, “La Mort Annoncée des Groupements de Moyens Dans le Secteur Bancaire, Financier et des Assurances?” 10 Revue de Droit Fiscal 194 (2017).
41 Kirsch and Gamito, supra note 4, at 279.
42 European Commission, supra note 5, at point 3.4.1.
43 Supra note 26, at para. 50.
44 Jovanovic and Merkx, supra note 7, at 329.
45 Isabelle Rouberol, “Interactions Between Transfer Pricing and VAT Adjustments in the European Union,” 5 Int’l VAT Monitor 316 (Sept./Oct. 2016).
47 Killington and Gamito, supra note 16, at 19.
48 European Commission, “Possible VAT Implications of Transfer Pricing,” Working Paper 923 (Feb. 28, 2017).
49 Killington and Gamito, supra note 16, at 18.
50 Working Paper 883, supra note 10, at section 3.6.1.
51 Wolf, supra note 31.
52 Gert-Jan van Noorden, “State of Play in Respect of the Skandia America Corporation Case,” 4 EC Tax Review 213 (2016).
53 Killington and Gamito, supra note 16, at 18.
55 Wolf, supra note 31.
56 Confédération Fiscale Européenne, “VAT Exemption of Services Provided by an Independent Group of Persons (Article 132(1)(f) of Directive 2006/112/EC),” Opinion Statement FC 05/2017, 2.3 (2017).
57 Commission v. Belgium, C-324/82 (CJEU 1984), at para. 29.
58 Confédération Fiscale Européenne, supra note 56, at 2.5.
59 Council Regulation (EU) 904/2010 of October 7, 2010, on administrative cooperation and combating fraud in the field of VAT,  JO L 268/1.
60 Id. at article 2(1)(f).
61 TFEU article 56.
62 Wolf, supra note 31.
63 Rita de la Feria, “VAT and the EC Internal Market: The Shortcomings of Harmonisation,” WP 29 Oxford University Centre for Business Taxation 23 (2009).
64 Those concerns also arise with VAT grouping and the compatibility of article 11 of the VAT directive with the freedom of establishment. The CJEU has yet to assess the compatibility of the VAT directive with TFEU fundamental freedoms. See Christian Amand, “Cross-Border Entities and EU VAT: A Contradictory Concept?” 1 Int’l VAT Monitor 22 (Jan./Feb. 2010); and de la Feria, supra note 63, at 14.
65 Kirsch and Gamito, “VAT Groupings and Their Cross-Border Consequences,” 10(12) Bloomberg BNA Int’l Indirect Tax 6 (2012) .
66 Article 59 of the VAT directive.
67 European Commission, supra note 5, at 18.
69 Jovanovic and Merkx, “The Cost Sharing Exemption Under Debate — Part II,” 6 Int’l VAT Monitor 419 (Sept./Oct. 2016).
70 Confédération Fiscale Européenne, supra note 56, at 2.7.
71 Killington and Gamito, supra note 16, at 19.