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The judgment of the European Court of Justice (ECJ) of March 11, 2021 in case C-812/19 (Danske Bank case) clarified how the provision of cross-border services within the same legal entity should be treated from a VAT perspective. The case concerns the principal establishment of Danske Bank, which is based in Denmark and is a member of a VAT group in that country, where its branch established in Sweden, which is the recipient of cross-border services provided by the principal establishment, is not a member of the Danish VAT group, and nor any other in the country of establishment.
Danske Bank’s principal establishment, based in Denmark, which is part of the Danish VAT group, provides IT services in the form of a computer platform to its Swedish branch. Then the costs associated with using that platform are charged to Swedish branch by Danish principal establishment. The branch established in Sweden is not a member of any VAT group.
The Swedish branch of the company asked Revenue Law Commission in Sweden for a tax statement on whether the principal establishment in Denmark and its branch in Sweden could be considered as single taxable person or two separate persons for VAT purposes, and whether the services provided by the principal establishment to its the Swedish branch where the associated costs are charged to it, shall be considered as a taxable transaction for which the Swedish branch, as the recipient of the services, is required to pay VAT. The case was later taken over by the Supreme Court, Sweden, which stayed the proceedings and referred the matter to the ECJ.
In order to answer these questions, the ECJ drew on an earlier judgment of 17 September 2014 in Case C-7/13 (Skandia America Corp. (USA), filial Sverige), where a principal establishment based in USA provided services to its branch established in a Member State of the European Union, which was a member of a VAT group in that Member State. In that judgment, the ECJ held that the supply of services by a principal establishment of a company established in a third country to its branch in a Member State shall be considered as a taxable transaction if that branch is a member of a group of persons who may be regarded as a single taxable person for VAT purposes.
The ECJ further highlighted the territorial limitation arising from Article 11 of Directive 2006/112/EC (hereinafter “the VAT Directive”), which regulates the possibility to treat several persons as a single taxable person. The Danish legislation, which transposes Article 11 of the VAT Directive, authorizes several taxable persons who have the same owner and are established in the same Member State to register a Danish VAT group. The group can only concern undertakings established in Denmark.
Based on the stated above, the ECJ held as follows:
The rules for VAT group registration (pursuant to Article 11 of the VAT Directive) have been implemented by several EU countries, including Slovakia. If the company has several establishments in different countries, when reposting the costs of services provided between these establishments within the same legal entity, we recommend checking whether any of these establishments is part of the VAT group in the country of establishment. Participation in a VAT group registration may result in the transaction being regarded as a transaction between two different taxable persons and will be subject to VAT.
On 18 May 2021, the European Commission adopted a Communication on Business Taxation for the 21st century (COM(2021) 251 final). It sets out short-term and long-term agenda for business taxation in the European Union.
Below we would like to draw your attention to the planned actions based on the Communication, which we consider the most significant.
The European Commission will present, by 2023, a new framework for income taxation. The “Business in Europe: Framework for Income Taxation” (or BEFIT) will provide a single corporate tax rulebook for the European Union. The BEFIT will consolidate the profits of the EU members of a multinational group into a single tax base, which will then be allocated to Member States using a formula, to be taxed at national corporate income tax rates. It will replace the pending proposal for a Common Consolidated Corporate Tax Base, which will be withdrawn.
The European Commission will issue a new proposal requiring certain large companies operating in the European Union to publish their effective tax rates based on the methodology under discussion in Pillar 2 of the OECD negotiations by 2022. The effective corporate tax rate provides information regarding the proportion of corporate tax paid by companies relative to the amount of profits they generate rather than relative to their ‘taxable profits’, which can be reduced through various means such as tax allowances.
The European Commission will tackle the abusive use of shell companies through the proposal of new anti-tax avoidance measures (ATAD 3) by the fourth quarter of 2021. The initiative aims to ensure that EU legal entities with no or minimal substantial presence and real economic activity will not benefit from tax advantages. The Commission also intends to take further steps to prevent royalty and interest payments leaving the EU from escaping taxation (so-called ‘double non-taxation’).
The European Commission will support innovation by addressing the debt-equity bias in the current corporate taxation (which treats debt financing of companies more favourably than equity financing) via an allowance system (Debt Equity Bias Reduction Allowance (or DEBRA)) for equity financing by the first quarter of 2022.
Additionally, the European Commission has recommended Member States allowing businesses to carry back losses as a support measure for their recovery from the COVID-19 pandemic. The loss carry-back would enable companies that were making a profit and paying taxes in the years prior to 2020 to offset their 2020 and 2021 losses against these taxes. The recommendation was issued on 18 May 2021 (C(2021)3484 final). In order to limit the impact on national budgets, Member States should limit the amount of losses to be carried back. EUR 3 million per loss making fiscal year should be the maximum amount for the loss carry back.
In the recent days, the Parliament approved an amendment to emergency financial measures in Slovakia, including several financial measures to mitigate negative economic impacts on taxpayers due to the pandemic.
The measures:
The Tax Code was amended as well, so the Government of the Slovak republic can by means of regulation determine the conditions for waiving the imposition of tax penalties, the so-called tax amnesty.
On February 6, 2021, an amendment to Act no. 67/2020 Coll. on certain emergency measures in the field of finance in connection with the spread of the dangerous contagious human disease COVID-19 published under number 47/2021 Coll. came into effect.This amendment introduces that the expenses incurred by employers or taxpayers with incomes from business or another self-employed activity during the pandemic period for testing the COVID-19 are considered as tax deductible.
The tax expenses also include expenses disbursed on close persons of employees or a taxpayer with incomes from business or another self-employed activity, who live in the same household with them.
The tax expenses also include expenses of a taxpayer disbursed on testing natural persons who perform an activity for the taxpayer in the place of his business. According to the explanatory memorandum, these are persons who are in the company of the taxpayer as part of the testing and who follow the instructions of the business operator according to his assignment and orders. Such persons also include employees of cooperating companies who perform their work physically at the workplace of the service buyer such as, e.g. employees of an external company who perform logistic, servicing or cleaning activities that are provided in the form of services.
At the same time, the above-mentioned amendment introduces that in case of providing COVID-19 testing for employees and their relatives, the benefit in kind provided in such way by the employer during the pandemic period is not an object to taxation at the level of the employee.
This can also be used retroactively for the tax period of 2020. If the employer has already made an annual settlement for 2020 or issued a certificate of taxable income for 2020, he may proceed in accordance with Section 40 of Income Tax Act, i.e. he shall issue a corrective annual settlement of tax advances from income from dependent activity or a corrective certificate of taxable incomes for 2020.
With the above-mentioned amendment, the conditions for the application of a tax bonus on a dependent child for 2020 were also amended with effect from February 6, 2021.
The measure is aimed on taxpayers who have incomes from a dependent activity or incomes from business or another self-employed activity, and who couldn’t perform their work due to anti-pandemic measures.
If the taxpayer haven’t reached the required minimum amount of taxable incomes from his own performed activity for the purposes of applying of the tax bonus (six times the minimum wage, e.g. 580 x 6 = EUR 3,480 for 2020), he may also include in up to the amount of these incomes:
The employer is obliged to take this into account when performing the annual settlement of the tax for 2020, if the employee provides him this information no later than on February 15, 2021. If the employer has already performed the annual settlement for 2020, he shall issue a corrective annual settlement of the tax advances from income from a dependent activity.
On February 5, 2021, the Parliament approved in simplified legislative procedure another amendment to Act no. 67/2020 Coll. on certain emergency measures in the field of finance in connection with the spread of the dangerous contagious human disease COVID-19, in order to temporarily exempt the sale of selected protective equipment from VAT.
The amendment will come into effect upon its publication in the Collection of Laws of the Slovak republic.
Until April 30, 2021, the zero VAT rate will apply to personal protective equipment intended to ensure better respiratory protection, that are filter face mask of category FFP2 or a filter face mask of category FFP3.
According to the explanatory memorandum, the measure seeks to reduce the price of these goods for the final customer.
On February 6, 2021, an amendment to the Tax Code published under no. 45/2021 Coll. entered into force. The amendment to the act was approved by the Parliament in a simplified legislative procedure at the end of January this year.
This amendment introduces a new competency for the Government of the Slovak republic which allows to set conditions by regulation for the termination of tax arrears corresponding to the unpaid penalties, as well as the conditions under which the imposition of a penalty can be waived. This will apply to all types of penalties in relation to all taxes.
Such a regulation will also apply to infringements that occurred before the entry into force of this legislation.
By the amendment to Act no. 442/2012 Coll. on international assistance and cooperation in tax administration, DAC6 in Slovakia has been implemented, which is also known as the Council Directive (EU) 2018/822 of May 25, 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements. Below, we present you a brief overview of obligations that arise from this legislation and that can impose a reporting obligation to a tax subject, natural and legal person.
The subject to the reporting shall be arrangements of potentially aggressive cross-border tax planning. The introduction of this reporting obligation aims to strengthen tax transparency, prevent tax avoidance and tax evasion.
The first reporting obligations must be fulfilled by January 31, 2021 and by February 28, 2021 in relation to reportable cross-border arrangements introduced between June 2018 and December 2020. New arrangements from January 1, 2021 will be subject to a 30-day period from the introduction of a new reportable cross-border arrangement.
In order for an arrangement to fulfil the characteristics of cross-border arrangement, the arrangement must concern at least two member states or a member state and non-member state within which the natural persons or entities involved in the arrangements have a residence for tax purposes, a permanent establishment or they conduct an operation there, or this cross-border arrangement proved the possibility to avoid obligations related to the automatic exchange of information about financial accounts or information related to the identification of the beneficial owner of the income.
The reportable cross-border arrangement is every cross-border arrangement if it contains at least one of the hallmarks listed in the Annex no. 1a of Act no. 442/2012 Coll. as amended (Annex IV of the mentioned EU Council Directive). The hallmark means a characteristic or feature of a cross-border arrangement that presents an indication of a potential risk of tax avoidance. For example, it may be the aspect of using company´s losses, changing the classification of income or capital, avoiding the automatic exchange of information on financial accounts, etc. The mentioned Annex no. 1a defines which hallmarks should be taken into account only where they fulfil the main benefit test (i.e., it can be established that the main benefit or one of the main benefits, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage) and which should be assessed alone.
The primary obliged subject is a person that designed, marketed, organized, made available for implementation or managed the implementation of a reportable cross-border arrangement, or a person who in relation to these arrangements offered a help, support or assistance, i.e., it is a person who is an intermediary.
If the intermediary is bound by a legal duty of confidentiality (e.g., tax advisers, lawyers) and all intermediaries involved in the reportable arrangement are bound by a legal duty of confidentiality regarding the specific reportable arrangement which was offered, proposed, etc. to an user (her/his client), the obliged person instead of the intermediary is the user of the reportable arrangement (i.e., relevant taxpayer), to which the obligation to file information about the reportable arrangement to a relevant authority is transferred.
The user becomes obliged person even in a case, when he proposes the reportable arrangement on his own without using the services of the intermediary, so-called “in-house”.
The user becomes obliged person even in a case, when the reportable arrangement is provided by an intermediary directly to the user, but this intermediary is not an intermediary from EU member state.
Information on the reportable cross-border arrangement shall be notified by the obliged person to the competent authority of the Slovak republic, which is the Financial Directorate of the Slovak republic, electronically via the financial administration portal and using the electronic structured DAC6 Notification form.
The information notified by the obliged person to the financial administration include: identification data of the persons concerned, including the state of tax residence, the data on the reportable cross-border arrangement (name, description, hallmarks), date of the implementation and the estimated value of the reportable cross-border arrangement.
If the obliged person is a user (a relevant taxpayer) operating in more than one member state, the law determined the mechanism for determining in which country the user files information:
The user who would be obliged to file information in the Slovak republic is exempted from the reporting obligation if he files electronically to the relevant authority in the Slovak republic a declaration that the same information on the reportable arrangement, which he should file to the relevant authority in the Slovak republic, has already been filed by him to the relevant authority in another member state.
If there are more users who are required to file information on the same reportable arrangement and are aware of each other being involved in the same reportable arrangement, these users may agree on a joint representative who will electronically file a mutual declaration confirming that the same information on the reportable arrangement has already been filed by another user.
In relation to the new arrangements from January 1, 2021, the obliged person is obliged to file the information within 30 days from the availability, preparation or implementation of the reportable arrangement and subsequently within 30 days from the last day of the calendar quarter, if new information is available to the intermediary since the last submission.
In relation to the arrangements implemented between June 2018 and December 2020, it applies that:
The tax office is entitled to impose a fine of up to EUR 30,000, even repeatedly, in the event of non-compliance with the above obligation.
We recommend you evaluating the cross-border arrangements in which you were involved from 2018 in terms of the above-mentioned characteristics, in order to identify a possible reporting obligation. We also recommend you paying attention to the new cross-border arrangements. The reporting obligation arises only in case when you identify cross-border arrangements that are subject to the reporting.
Regarding the end of the transition period on December 31, 2020 provided for in the Agreement on the leaving of the United Kingdom of Great Britain and Northern Ireland (“UK”) from the European Union, below, we bring you an overview of the most significant changes in the tax and customs legislation regarding Slovakia, which will apply from January 1, 2021 to the transactions with the UK.
Based on the agreement between the UK and the EU, after the UK left the EU, so-called transition period was applied during which the UK continued to be considered as a member state of the EU in the area of taxes and customs. This transition period ends on December 31, 2020 and it leads to several significant changes, in particular in the area of customs and customs duties, VAT regime of the transactions between the EU member states and the UK and related reporting obligations.
Until today, no trade agreement has been concluded between the EU and the UK representatives to regulate the trade relations. The most important point of this agreement in the terms of taxes and customs is that, once the agreement is concluded, the customs on mutually supplied goods would not be a subject to the customs duties, although, the trade in goods would be a subject to the customs regulation, but only in the area of the administrative obligations.
Considering the fact, that several days remain until the end of the transition period, it is unlikely that a trade agreement will be concluded by this date. Companies trading with counterparty from the UK (mainly with goods imported or exported to the UK) should be prepared for the fact, that from January 1, 2021, such transactions will be subject to the same rules applied to the transactions with the third countries, including customs controls and customs payments on exports and imports of goods.
In addition to other customs obligations, we would like to point out that the entities cooperating with the counterparty from the UK will have to be assigned so-called EORI, since every participant in the customs procedure must have it assigned. Entrepreneurs who plan to trade from the new year with the UK must apply to the Financial Directorate of the Slovak republic for the EORI number.
Export of the goods to the UK after the end of the transition period will no longer be considered as a supply of goods to another EU member state, but the goods will be exempt from VAT if the standard conditions are met. Due to this reason, the export of goods to the UK will not be included in the EC Sales List, but only in the relevant line of the tax return.
Similarly, imports of goods from the UK will not be considered as acquisition of goods from another EU member state, but it will be a subject to VAT within a customs procedure.
In the case of services, the place of the supply will be determined in the same way as before, since whether the supplier or the customer of the service is a person from a member state or from the third country does not affect the determination of the place of the supply of the service. In the case of services received from the UK, if the place of the supply of the service is in the Slovak republic, the domestic taxable person will be obliged to apply the reverse-charge to the transaction and pay the VAT in the Slovak republic. The change occurs in the case of services delivered to the counterparty to the UK, if the place of the delivery of the service is determined according to the basic principle at the customer´s seat. These services shall be included in the EC Sales List until December 31, 2020, however, from January 1, 2021, these transactions will no longer be subject to the reporting in any of the VAT returns in the Slovak republic.
For the period of 2020, the VAT payers may apply for the VAT refund paid in the UK in the standard electronic way no later than on March 31, 2021. The deadline is relatively strict compared to the standard deadline of September 30 of the following calendar year, which applies to the application for VAT refund paid in other EU member state and until the end of the transition period was also applied to the VAT from the UK. The same deadline for submitting the application for VAT refund paid in the EU member state for the mentioned period will apply to VAT payers established in the UK.
It will no longer be possible to apply for the VAT refund paid in 2021 in the UK, as has been the case do far, but it will be necessary to validate the method and conditions under the UK legislation, which can cause significant complications for the entrepreneurs in the EU.
The application of condition to the counterparty from the UK, as well as to the third countries will not be applied to the supply of goods from and to the Northern Ireland area. Under a mutual agreement between the EU and the UK, the supply of goods and service to and from the Northern Ireland will be a subject to an exception over a period of at least 4 years from the end of the transition period, allowing the Northern Ireland to be treated as an EU member state during this period.
Please note that the exception only applies to the transactions of goods; in the case of services with the counterparty from the Northern Ireland, they will be subject to the same VAT rules as applies to the third countries. This means, that the delivery of the service to the customer in the Northern Ireland will not be included in the EC Sales List.
At the same time, the so far unused country code ”XI” is being introduced, which will be used for deliveries of goods to the territory of Northern Ireland in the EC Sales Lists and Intrastat declarations.
The taxable persons established in the UK or in other third countries who will be interested in using the so-called mini one stop shop scheme (“MOSS”) from January 1, 2021, for the provision of telecommunications services, TV and radio broadcasting services or electronically supplied services to the non-taxable person from the EU member states will have to register with the MOSS scheme in the EU member state; they will no longer be able to be registered in the UK.
The taxable persons currently registered in the MOSS scheme who will provide the telecommunications services, TV and radio broadcasting services or electronically supplies services after December 31, 2020 to the non-taxable persons in the UK, will no longer be able to use the MOSS scheme. They will have to comply in accordance with the legislation valid in the UK.
From January 1, 2021, the UK will no longer be considered as a taxpayer of EU member state or as a taxpayer of a state who is a contracting party to the EEA Agreement. The exclusion of the UK from this group will affect the application of certain provisions of the Income Tax Act, and transactions with the UK will no longer be eligible for certain benefits granted by the Income Tax Act to the transactions until the end of the transition period as EU member state.
The assessment of tax obligations in the area of direct taxes will have to be based on the valid Income Tax Act and the valid Double Tax Treaty concluded between the UK and the Slovak republic.
According to Council Directive 2006/112/EC on the common system of value added tax, the place of supply of services connected with immovable property is the place where the immovable property is located.
Should this specific rule apply also to computing centre services with which a trader provides its customers with equipment cabinets in a computing centre for holding customers´ servers together with ancillary services? Should these services be considered as services connected with immovable property for VAT purposes?
In this publication of our News Flash, we would like to briefly introduce you the recent conclusion of the European Court of Justice (ECJ) in the case C-215/19 A Oy, which dealt with the determination of the place of supply for VAT purposes of computing centre services.
The company A Oy, a tax resident in Finland, offers computing centre services to its customers established in Finland and in other Member States of the European Union. These services include the provision of a server cabinet with a lockable door, power supply and services ensuring the best possible operating environment for servers, such as temperature and humidity control, cooling protection, power supply interruptions monitoring, fire alarm, electronic access control and others.The server cabinets are bolted to the floor in a building rented by A Oy. The users place their own devices in the server cabinets, which are also screwed into the server cabinets and can be removed in a matter of minutes. Customers do not have a key to the server cabinets, where their servers are placed, but after verification of their identity, they can receive it from the security service. The company A Oy is not entitled to access its customers’ server cabinets.
The tax office was of the opinion that the computing centre services should be considered as services connected with immovable property as the rental of the technical space for the hosting of customers´ servers is a major and necessary element of the package of services provided by A Oy.
Later on, the Helsinki Administrative Court decided to annul the tax office resolution, stating that although the server cabinets, which are intended for placing of the servers, were bolted to the floor, they could be moved without destroying or modifying the building and therefore, they do not constitute immovable property. According to the administrative court in this case, the company A Oy provides its customers with package of services, the main purpose of which is to provide customers with the best environment for the operation of their own servers.
The case was brought before the Supreme Administrative Court of Finland, which requested the ECJ for a preliminary ruling to the following questions:
According to the ECJ, the computing centre services in question do not constitute the leasing of immovable property falling within the VAT exemption. The ECJ assumes that the provider does not restrict itself to passively providing space or places to its customers by guaranteeing them the right to occupy it as if they were the owners. The ESD further argues that server cabinets are not an integral part of the building in which they are installed nor are they installed there permanently.
According to the ECJ, the computing centre services also do not constitute services connected with immovable property, where those customers do not enjoy the right to exclusive use of the part of the building in which the server cabinets are installed.
In accordance with the Council Directive 2006/112/EC on the common system of value added tax, exempted from VAT shall be the supply of services by independent groups 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 exact reimbursement of their share of the joint expenses, provided that such exemption is not likely to cause distortion of competition.
In this publication of our News Flash, we would like to briefly introduce you the recent conclusion of the Court of Justice of the European Union (ECJ) in case of supplies of services to members and non-members from the VAT point of view, where an independent group of persons supplied services to their members and to non-members as well.
Infohos is an association that specializes in hospital information technology and in this area it provides services to hospitals that are members of this association.
Infohos concluded a cooperation agreement with the independent company IHC – Group NV to jointly develop innovative software. Infohos did not register as a taxable person for VAT purposes because it was of the opinion that it is not obliged to do so, and it provides tax exempted services.
After the tax audit, the Belgian Tax Authorities concluded that services supplied between Infohos and IHC – Group NV should be subject to VAT. Moreover, subject to VAT should be also transactions provided to members of the Infohos association and so the association was not eligible to apply an exemption from tax of services supplied to their members.
It is important to note that above mentioned provision of the Directive was transposed into Belgian law with an amendment which says that such activities are exempted from tax only in case of their consideration as supply of services exclusively to their own members.
The question that the ECJ dealt with is whether the respective provision of the Directive must be interpreted as allowing the EU Member States to implement such exclusivity condition for exemption from tax, through which the independent group of people which supplies services to non-members too, becomes fully taxable person for VAT purposes also in connection to services supplied to their members.
Considering that services which this case concerns directly contribute to carry out the activities of public interest and considering a context and what the aim of this Directive provision is, the ECJ decided that even in case if the independent group of people, like Infohos is, supplies services also to subjects who are not the members, it does not affect the fact that it supplies services to own members which are exempted from tax.
Adjustment shall, in particular, be made where, after the initial VAT deduction is claimed, some change occurs in the factors used to determine the amount to be deducted, for example where purchases are cancelled or price reductions are obtained.
On 28 May 2020, the Court of Justice of the European Union, in the World Comm Trading case (Case C-684/18), addressed the consequences of the adjustment of initial VAT deduction as a result of volume rebates.
World Comm Trading Gfz (established in Romania) hereinafter referred to as “World Comm” and the Nokia group (with its headquarter in Finland) concluded a distribution agreement based on which World Comm purchased a series of mobile telephony products from the Nokia group.
The products were delivered to World Comm in Romania from Finland, Germany, Hungary, and from Romania. Nokia was VAT registered in these countries, at the time it was supplying goods in and from these countries.World Comm received a discount, on reaching a certain quantity, regardless of the location from which the Nokia products were delivered (Romania or intra-Community). For these discounts, Nokia Corporation (HQ) issued a single invoice every quarter with the minus sign and its Finnish VAT number.
The dispute was about the Romanian part of the rebates processed through one credit note (as part of a global settlement) without adjusting any VAT, notwithstanding that the initial supplies were invoiced with Romanian VAT.
World Comm recorded the entire amount as an intra-Community acquisition, even if part of the goods were delivered from Romania. The Romanian tax authorities did not agree with this approach. The tax authorities state that World Comm has incorrectly adjusted the right to deduct for the entire discount received. World Comm should have distinguished between domestic and intra-Community supplies.
Note: Nokia had already ended its activities in Romania at the time of the tax inspection. As a result, it would no longer have had the possibility to invoice the discounts for domestic deliveries separately.
The Court ruled that the Member State’s tax authorities are required to demand an adjustment in the input VAT initially deducted as a result of the reduction of the tax base to the extent it related to the local purchases. Article 185 of Directive 2006/112 must be interpreted as meaning that an adjustment of a deduction of value added tax (VAT) initially made is required in respect of a taxable person established in a Member State, even where that taxable person’s supplier has ceased his activities in that Member State and that supplier can therefore no longer claim repayment of part of the VAT he has paid.
In this edition of our ECJ Judgement article, we would like to briefly outline a case of the European Court of Justice (ECJ), which was published in common cases C-13/18 (Sole-Mizo Zrt.) and C 126/18 (Dalmandi Mezőgazdasági Zrt.), which dealt with the reasonable amount of interest, that has to be returned by Hungarian Tax authority, on a retained excess deductible VAT.
ECJ dealt with issues of substantive and procedural conditions under which a taxable person should be returned by the excess VAT deduction that could not be returned in a reasonable term because of a condition given by Hungarian legislation, which was consequently declared contrary to EU law.
Referring to a resolution as of 17 July 2014 of Delphi Hungary, in which the ECJ stated that Union law precluded legislation of the Member States which exclude the payment of interest on an excess deductible VAT which could not be returned because of the existence of a national provision which was later declared to be incompatible with EU law, Sole Mizo submitted a request for the payment of interest on retained excess deductible VAT to the Tax authority.In this regards, company Sole Mizo requested the following:
The Tax authority partially granted the request, granting the company interest on the retained excess deductible VAT, which was calculated using an interest rate equal to the simple basic interest rate of the Hungarian Central Bank. The Tax authority rejected the request in its second part, concerning the payment of late payment interest calculated at a rate equal to double basic rate of the Hungarian Central Bank due to the delay in paying that interest. The company argued that interest on the retained excess deductible VAT should also be calculated by applying a rate equal to double basic rate of the Hungarian Central Bank.
Company Dalmandi also applied for the payment of interest on the retained excess deductible VAT and also requested that double basic rate of the Hungarian Central Bank should be used in the calculations.
These cases gradually came to a Hungarian court, which further referred several questions to the ECJ concerning the adequacy of the amount of interest, the conditionality of interest by filing the request and the limitation period.
The question was also whether the period during which the tax administrator was not required to reimburse the excess deductible VAT under national legislation should be taken into account when calculating the amount of interest on the retained excess deductible VAT, as the ECJ stated later on that the provision was contrary to EU legislation.
The ECJ decided in these cases that EU law and the principles of efficiency and tax neutrality in particular, precluded a Member State’s practice regarding calculation of interest on the excess deductible VAT retained beyond a reasonable period of time in breach of EU law by applying an interest rate equal to the basic rate of national central bank, if this rate is lower than the rate that a taxable person who is not a credit institution would have to pay for borrowing an amount equal to the amount in question.
According to the ECJ, the interest on the excess deductible VAT in question is to be calculated in such a way as to compensate decrease in value due to the passage of time from the period in which the excess VAT deduction was declared until the actual payment of that interest, to the taxable person.
The ECJ further stated that Union law and the principles of effectiveness and equivalence in particular, do not preclude a Member State’s practice of setting a limitation period for submitting a request for a payment of interest on excess deductible VAT retained because of the application of a national provision found to be contrary to Union law.
In case of late payment interest due on non-payment by the Tax authority within the statutory deadline for payment of interest on excess deductible VAT retained in breach of EU law, the ECJ decided that EU law did not preclude a Member State’s practice of making default late payment interest conditional on a specific request, while in other cases such interest was granted ex offo. The ECJ has also decided that it is appropriate to apply this interest rather from the expiration of the deadline set for the Tax authority to process such a request, than from the date on which the excess VAT deduction arose.
In regards with the ECJ’s findings on the need to adequately compensate the financial loss from the retained excess deductible VAT at the level of interest, the position of taxable persons in disputes with the financial administration in case of non-grant a reasonable interest may be strengthened.
In accordance with the Slovak VAT Act, in case the Tax authority has opened a tax audit and the excess VAT deduction has not been refunded within the 6-month period, the taxpayer is entitled to be granted with interest on the retained excess deductible VAT after the 6 months in question until the date of its refund. Double basic interest rate of ECB shall be used to calculate the interest. If this double interest does not reach 1,5 %, the annual interest rate of 1,5 % shall be applied.
Therefore, there arises a question, whether this legislation is compatible with EU law, the principles of proportionality, fiscal neutrality, equivalence and efficiency in particular.
In this issue of our ECJ Judgement articles, we would like to briefly outline the recent case of the European Court of Justice (ECJ), C-405/18 Aures Holdings a. s., which concerns the change in tax residency and importation of foreign tax loss. The ECJ ruled in a case regrading the possibility to claim tax loss incurred to the company in the Member State of incorporation prior to the transfer of its place of effective management to the other Member State.
The company, as a Dutch tax resident, suffered a tax loss in the Netherlands in 2007, which was assessed in accordance with Netherlands tax law. In 2008, the company set up a branch in the Czech Republic, which, under Czech Act on Income Tax was deemed as a permanent establishment. In 2009, the company transferred its place of effective management from the Netherlands to the Czech Republic and became a Czech tax resident. However, the company´s registered seat remained in the Netherlands and the company remains governed by Netherlands law.
In 2012, the company requested that its 2007 Dutch tax loss be taken into account in order to reduce its tax base in the Czech Republic. The Czech tax authority rejected the request by the reason that the Czech Law on Income Tax does not allow the deduction of a tax loss in the case of a change in tax residency and does not provide for the transfer of such a loss from another Member State.
The case has got before the Supreme Administrative Court (SAC) in the Czech Republic. The company was of the opinion that the impossibility of deduction of that loss from the year of 2007, which it could no longer claim in the Netherlands, results to an unjustified restriction of freedom of establishment guaranteed by the Treaty on the Functioning of the European Union (TFEU).
The SAC referred the following questions to the ECJ:
Allocation of power to impose taxes between Member States
Regarding the first question, the ECJ decided that transfer of the place of a company´s management to another Member State, without that transfer affecting its status as a company incorporated under Netherlands law, falls within the scope of freedom of establishment under Article 49 TFEU and the company may rely on that Article.
Regarding the second question, the ECJ deals with whether that Article precludes the state to approve such national legislation, which prevents taxpayer to claim a tax losses incurred in another Member State. The ECJ notes that the TFEU offers no guarantee to a company that transferring its place of effective management from one Member State to another Member State will be neutral as regards taxation. Further, the ECJ concludes that the aim of Czech legislation is preserving the allocation of the tax power between the Member States and preventing the risk of the double deduction of tax losses. Whereas the Czech Republic, the state to which a company transferred its place of company´s management, did not have a tax jurisdiction over the company in the year during which the company incurred tax loss, the Czech Republic cannot be forced to take into account a tax loss that incurred in the Netherlands.
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