Analysis of the decision of the Court of Justice in Case C-77/19 (Kaplan International Colleges UK)
Prepared by Alessia Zanatto, Paolo Galfano and Giorgio Beretta
With its decision in Case C-77/19 (Kaplan International Colleges UK) of 18 November 2020, the Court of Justice of the European Union (hereinafter, also the “CJEU” or the “Court of Justice”) offers some clarification on the scope of application of the VAT exemption provided for services rendered by an independent group of persons to its members, where some of those members also participate in a VAT group.
Article 132, paragraph 1, letter f), of Directive 2006/112/EC (hereinafter, also the “VAT Directive”) sets forth an exemption from VAT for “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”. This provision, as interpreted by the Court of Justice (see decisions rendered by the CJEU in Cases C‑605/15, C-616/15 and C-326/15), is applicable only if all members of the group carry out activities in the public interest.
The VAT exemption in question has been transposed into Italian VAT law by Article 10, paragraph 2, of Presidential Decree no. 633/1972, setting forth an exemption from VAT for “services rendered to members of a consortium by that consortium, including consortium companies and cooperative companies functioning as consortia, established between members in respect of which, in the three preceding calendar years, the allowance for input VAT deduction referred to in Article 19-bis [of Presidential Decree no. 633/1972], also as a result of the exercise of the option set forth in Article 36-bis [of Presidential Decree no. 633/1972], did not exceed 10%, provided that the amount paid by the members of the consortium to that consortium does not exceed the actual costs for supplying the services in question”.
Unlike EU VAT law, however, Italian VAT legislation makes no reference to the need for members of an independent group of persons to carry out an activity in the public interest (in the past, the Italian tax authorities have expressly confirmed the applicability of the exemption at hand to services rendered by consortium companies towards their own members, where those members supply VAT-exempt financial and insurance services). This circumstance raises doubts on whether the exemption as established under Italian VAT legislation is, in effect, compatible with the corresponding exemption as established under EU VAT law. Nevertheless, since a reform of the VAT treatment of financial services has been planned and developments on this side are expected at EU level, no change to that effect was made under Italian VAT legislation. In this regard, it should also be recalled that, due to the prohibition resulting from the so-called “reverse direct effect”, Italy is prevented from relying on the CJEU’s decisions recalled above to the detriment of Italian taxable persons.
The definition of “VAT group” is contained in Article 11 of the VAT Directive, where it is established that “each Member State may regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links”. Italy has availed itself of this possibility and an option for taxable persons established within the Italian territory to set up a VAT group is provided for in Articles 70-bis et seq. of Presidential Decree no. 633/1972 and in the implementing decree issued by the Ministry of Economy and Finance on 6 April 2018.
The question dealt with by the CJEU in the decision at comment concerns the specific relationship between the two provisions recalled above. Notably, the Court of Justice was asked to determine whether and under which conditions the VAT exemption established under Article 132, paragraph 1, letter f), of Directive 2006/112/EC apply, in case the members of an independent group of persons are also members of a VAT group.
The CJEU’s reasonings, in a reply to this question, is quite articulated. On the one hand, in fact, the Court of Justice maintains that Article 132, paragraph 1, letter f), of Directive 2006/112/EC, by its wording, does not exclude the operation of the exemption at hand with regard to services rendered to members of an independent group of persons, where those members are also part of a VAT group. On the other hand, however, the CJEU reasons that, given that VAT exemptions are to be interpreted strictly, the establishment of a VAT group cannot amount to a de facto extension of the said exemption to supplies of services rendered to persons who are not also members of an independent group of persons.
It follows that treatment as a single taxable person precludes members of a VAT group from being considered as individual taxable persons for the purposes of VAT. The result is that, in such situation, the services supplied by a third party to a member of the VAT group must be considered, for VAT purposes, to have been made not to that member but to the actual VAT group as a whole (in this regard, the EU judges refer to the principles established by the CJEU in Case C-7/13, Skandia America (USA), filial Sverige). According to the CJEU, also an independent group of persons – being a third party and not, at the same, a member of a VAT group – must abide to the aforementioned principles when such independent group of persons provides services to its own members, if those members are also part of a VAT group.
On the basis of the above reasonings, the CJEU concludes that only if all the members of a VAT group are also members of an independent group of persons – which, however, must not be itself a member of such VAT group – the VAT exemption under Article 132 of the Directive can be applied (provided that, in such event, all the other requirements established under such provision are fulfilled).
On this point, from an Italian VAT law perspective, reference should be made to the recent introduction of paragraphs 3-bis and 3-ter into Article 70-quinquies of Presidential Decree no. 633/1972.
In short, these provisions (introduced under Italian VAT law as a form of authentic interpretation of previous legislation) establish, if the requirements set forth in Article 10, paragraph 2, of Presidential Decree no. 633/1972 are fulfilled, the application of the VAT exemption for services rendered by a consortium (i.e., an independent group of persons, a consortium companies and the like) to one of its members who is also a member of a VAT group to which that consortium is not itself a member, on condition that, during the three preceding calendar years, the allowance for input VAT deduction by the person acquiring the services in question did not exceed 10%, such percentage to be calculated as follows: (i) for each member of the consortium, on the basis of each of the years prior to the exercise of the option for the VAT group that are included in the referred three-year period; (ii) for the VAT group, on the basis of each year of the application of the option for the VAT group that are included in the referred three-year period.
From an examination of these provisions it follows that, under Italian VAT law, not all members of a VAT group are required to be also members of an independent group of persons for the exemption in question to apply. The CJEU’s decision at hand, therefore, raises doubts on whether the Italian VAT provisions recently introduced are compatible with the corresponding provisions of the VAT Directive, as the latter have been interpreted by the CJEU in the case at hand.
Nonetheless, it must be recalled that, due to the prohibition resulting from the so-called “reverse direct effect”, Italy is prevented from relying on the CJEU’s decision at hand to the detriment of Italian taxable persons. Therefore, the decision of the Court of Justice at comment cannot have effect on past transactions. As for future transactions, Italian VAT law should instead be amended in order to take the recent ruling of the CJEU into account.
As a last point, it ought to be noted that, in its decision, the Court of Justice has left an issue open, concerning the question referred to the CJEU on whether the exemption under Article 132, paragraph 1, letter f), of Directive 2006/112/EC also has cross-border effects and covers independent group of persons established in non-EU countries (in the case at hand, Hong Kong). Advocate General Kokott dealt with such question at length and replied to it in the negative in her opinion (in accordance with her previous opinions released in Cases C-605/15 Aviva, paragraphs 36 et seq., and C-326/15 DNB Banka, paragraphs 45 et seq.). The question concerning the territorial application of the exemption above was also discussed on other occasions, although no definitive position has been reached in this regard (see, in particular, the VAT Committee’s Working Papers no. 856 and 883 of 2015).
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