Sampension, a Danish life insurance company providing pension-related services, and its management company operated for years as a single VAT entity. That arrangement fell apart following a routine change in ownership. What followed was a multi-year fight through Denmark's Tax Administration and courts, ultimately landing before the Court of Justice of the European Union (ECJ) with a question that could reshape how VAT groups work across the EU.

Background of the Case 

Until January 1, 2017, Sampension and its wholly owned management company were registered together as a VAT group, meaning they were treated as a single VAT entity. The management company provided administrative services not only to Sampension but also to two separate pension funds, each of which later acquired a 3% ownership interest in the management company in 2017. 

Under Danish law, a company that forms a VAT group with entities engaged in both taxable and exempt activities must own all of the other group members’ capital. Since Sampension no longer owned 100% of the management company, the VAT group ceased to exist.

In 2019, Sampension requested to be reregistered as a VAT group with the management company, arguing that the Danish 100% ownership requirement was incompatible with Article 11 of the EU VAT Directive. The Danish Tax Administration denied the request because the ownership requirement was not satisfied. This decision was upheld by the National Tax Tribunal.

Sampension appealed once again, this time before the Eastern High Court of Denmark (High Court). Given that the dispute raised fundamental questions about Denmark's national rules, the High Court paused the proceedings and asked the ECJ for clarification on two key issues concerning VAT grouping rules.

Main Questions from Request for Ruling

With the first question, the High Court asked whether Article 11 of the EU VAT Directive allows EU countries to impose a strict requirement that one member of a VAT group must directly or indirectly own 100% of the other members’ capital, particularly where the VAT group includes entities that are not subject to VAT registration or do not carry out economic activities.

The second question asked whether Article 11 has direct effect if the 100% ownership requirement is found to be incompatible with EU law. More specifically, with this question, the High Court asked whether taxable persons could rely directly on the EU provision against a national provision and require VAT group registration even where national legislation does not comply with EU law and cannot be interpreted consistently with it.

Applicable EU VAT Directive Article

Given the context and nature of the case, the ECJ only analyzed and interpreted Article 11 of the EU VAT Directive, which allows EU countries, after consulting the EU VAT Committee, to treat two or more legally independent entities established in the same EU country as a single taxable person for VAT purposes. To become eligible for this so-called VAT grouping mechanism, these entities must have close financial, economic, and organizational links.

Denmark's National VAT Rules

The ECJ interpreted Article 47(4) of the Danish VAT Law, which states that multiple taxable persons that exclusively carry out VAT-registered activities may apply to be registered under a single VAT number and treated as a VAT group. The provision also allows entities engaged in VAT-registered activities to form a VAT group with entities that carry out non-taxable activities or are not engaged in economic activities.

However, to qualify, one member of the group, typically a parent company, must directly or indirectly own 100% of the capital of the other members, such as subsidiaries or lower-tier subsidiaries.

Importance of the Case for Taxable Persons

Considering the purpose of the VAT grouping mechanism and the benefits it brings to large taxable persons, the dispute between Sampension and the Danish Ministry of Taxation is important as it raises broader questions about how much flexibility EU countries have when defining VAT group eligibility conditions. The ECJ reasoning in this case is particularly relevant for groups with complex ownership structures, including joint ventures, minority shareholders, pension structures, investment vehicles, and entities providing both taxable and exempt activities.

Analysis of the Court's Findings

The ECJ noted that the purpose of Article 11 is to simplify VAT administration and prevent abusive practices, such as artificially splitting a single business into multiple legal entities to obtain VAT advantages. Thus, the purpose of VAT grouping is to ensure that entities whose separate legal status is largely technical are treated as a single taxable person when they operate as a single economic unit.

As a result of grouping, entities that are part of the VAT group cease to be treated as separate taxable persons for VAT purposes. In other words, the VAT group itself becomes the sole taxable person. While Article 11 states that entities must be closely linked, it does not define what constitutes sufficiently close financial, economic, or organizational links. Therefore, EU countries are responsible for specifying these conditions in their national legislation.

What Counts as "Close Financial Links"

The conditions must be interpreted consistently across all EU countries. In particular, the concept of "close financial links" has an autonomous meaning under EU law and cannot be defined differently by each national legislation. Unlike VAT exemptions, which must be interpreted narrowly, Article 11 is a standard provision of the EU VAT Directive designed to facilitate VAT grouping where the necessary links exist. Consequently, the "close financial links" must be interpreted broadly and in light of the objectives of the provision, rather than restrictively.

EU countries do not have unlimited discretion under Article 11 to impose additional conditions on businesses seeking to form a VAT group. Moreover, under the case law, VAT grouping is not limited only to situations where one company controls or dominates the others through a traditional parent–subsidiary relationship. While such a connection may demonstrate that entities are closely connected, it is not a mandatory condition for forming a VAT group. 

The established case law also makes it clear that national legislation cannot impose additional ownership requirements to establish financial links. More particularly, the ECJ already ruled that EU countries cannot require both a majority ownership of share capital and a majority of voting rights as a condition for recognizing close financial links.

100% Ownership Condition as an Anti-abuse Measure

The ECJ noted that it is necessary to examine whether Denmark could justify the 100% ownership condition as an anti-abuse measure under Article 11. While EU countries have some discretion to introduce restrictions on VAT grouping to combat abusive practices, these must pursue the objectives of the VAT Directive and comply with fundamental principles of EU law, particularly the principles of proportionality and fiscal neutrality. 

Although the ECJ left the final determination to the national court, it nonetheless offered guidance on the question. The ECJ pointed out that the Danish Government argued that the 100% ownership requirement was necessary to prevent losses of VAT revenue and unfair tax advantages that could arise if entities carrying out VAT-exempt activities or no economic activities were included in VAT groups. 

According to Denmark, allowing such entities to participate in VAT groups without full ownership would enable them to obtain goods and services from other group members without VAT, reducing tax revenue. The ECJ rejected this reasoning, stating that the mere existence of a tax advantage resulting from participation in a VAT group does not, by itself, constitute tax evasion or avoidance. The VAT group mechanism was intentionally designed to allow transactions between group members to fall outside the scope of VAT.

Therefore, any resulting economic benefit is simply a consequence of an EU country choosing to implement that mechanism. The ECJ added that a purely hypothetical risk of tax evasion or avoidance cannot justify a general and absolute restriction on access to the VAT grouping regime.

Regarding whether the requirement was proportionate and appropriate for achieving the legitimate objective of combating abusive practices, the ECJ determined that it did not distinguish between situations involving a genuine risk of tax avoidance and situations where no such risk existed. On the contrary, the 100% ownership requirement relied solely on the group’s capital structure as an automatic exclusion criterion.

Furthermore, the ECJ concluded that the requirement has the potential to create unequal treatment between comparable economic operators. In essence, the ECJ stated that under this rule, two groups of businesses in comparable situations and carrying out the same transactions could receive different VAT treatment based only on their ownership structure. Entities with 100% ownership links would benefit from VAT grouping, while entities with slightly different capital structures would be denied access despite having equivalent economic integration.

On the question of Article 11's direct effect where a national provision is incompatible with EU law, the ECJ recalled that provisions of an EU directive may have direct effect where they are unconditional and sufficiently precise. In other words, individuals can invoke such provisions before national courts when an EU country has failed to properly implement the Directive or has implemented it incorrectly.

For a provision to be considered unconditional, it must establish a legal obligation that does not depend on additional conditions being fulfilled or on further measures being adopted by EU institutions or EU countries. Importantly, the ECJ recalled that under the established case-law, taxable persons could not directly rely on the VAT grouping provision against an EU country where national legislation was incompatible with EU law and could not be interpreted consistently with it.

Court's Final Decision

In the end, the ECJ determined that Article 11 prevents EU countries from making access to a VAT group conditional on a 100% ownership requirement where the group includes both entities carrying out VAT-taxable activities and entities carrying out VAT-exempt activities or no economic activity. However, this requirement may be imposed if it is shown to be a necessary and proportionate measure for achieving the objective of preventing tax evasion or tax avoidance.

Additionally, the ECJ concluded that Article 11 does not have direct effect, meaning that taxable persons cannot rely directly on that provision against a Member State to obtain VAT group registration where national legislation is incompatible with EU Law.

Conclusion

The ECJ's decision does not resolve Sampension's VAT group status outright. In fact, it sends it back to the Eastern High Court to decide. Nonetheless, it fundamentally reshapes the test Denmark must apply, shifting the focus from rigid ownership percentages to genuine economic integration and real risk of abuse. In a broader sense, businesses operating in the EU should take note that national ownership thresholds like Denmark's are now on much shakier ground, and that "closely bound" will be judged by the substance of their economic, financial, and organisational integration rather than by how neatly their capital structure fits a national formula.