Skandia Case: VAT Group Rules and Cross-Border Services

The Court of Justice of the European Union (ECJ) case between Skandia America Corp. (SAC), specifically its Swedish branch office, and the Swedish Tax Authority is one of the cases that changed EU-wide VAT rules and prompted EU countries to revise their national VAT rules on VAT groups. 

Additionally, the case had a direct impact on another later ECJ case, between Danske Bank and the Swedish Tax Agency. With the recent UK review and revision of its VAT groups rules, which made amendments in the post-Brexit era and departed from EU rules, the case once again came to the spotlight.

Background of the Case 

In 2007 and 2008, SAC acted as the Skandia group’s global purchasing company for IT services and operated in Sweden through its branch, Skandia Sverige. More precisely, SAC purchased IT services from external suppliers and redistributed them to companies across the Skandia group, including the Swedish branch. Notably, in July 2007, the Swedish branch became part of the Skandia group, meaning that, for VAT purposes, it was treated as integrated with other group members rather than as a separate entity.

The Swedish branch played a vital role in the Skandia group, as it was responsible for transforming externally sourced IT services into a final service known as IT-production, which it then supplied to Skandia group companies, both inside and outside the VAT group. A uniform 5% mark-up, an amount added to the cost of a product to determine its selling price, was applied both when SAC supplied services to the Skandia branch and when the branch supplied the final IT production services to other Skandia entities.

All allocated costs between SAC and the Swedish branch were documented through internal invoices. The Swedish Tax Authority concluded that IT services supplied by SAC to the Swedish branch were taxable transactions. Moreover, the Tax Authority considered SAC liable for VAT on those supplies. It also held the Swedish branch responsible for the corresponding VAT amount.

Nonetheless, the Swedish branch appealed the Tax Authority's decision before the Stockholm Administrative Court, which paused the proceedings and referred two questions to the ECJ.

Main Questions from Request For Ruling

With the first question,  the Administrative Court asked whether IT services purchased externally and supplied by a company’s main non-EU establishment to its EU-based branch office become taxable when the branch is part of a domestic VAT group.

The second question depends on the ECJ's conclusion regarding the first question. If the answer to the first question is positive, the Administrative Court further asked whether the non-EU main establishment should be regarded as a taxable person not established in the EU country under Article 196 of the EU VAT Directive, meaning that the VAT should be charged to the recipient of the services rather than the supplier.

Applicable EU VAT Directive Article

The ECJ identified several articles of the EU VAT Directive as the most relevant to this case. In addition to Article 196, which was directly cited in the referred question, that creates an exception from the general rules that VAT is due from the taxable person who supplies the goods or services for the certain cross-border services covered by Article 56, the ECJ highlighted Articles 2(1)(c), 11, 56, and 193 as the essential ones for settling this case.

Under Article 56(1), the place of supply for cross-border services, including consultancy, data processing, and electronically supplied services, is where the customer is established, whether inside or outside the EU. Additionally, since this Article mentions Annex II of the EU VAT Directive, the ECJ also included that Annex for consideration, which provides an indicative list of what constitutes electronically supplied services.

Finally, the ECJ noted that in July 2009, the European Commission issued a communication to the Council and the European Parliament clarifying its interpretation of the VAT group rules in Article 11 of the EU VAT Directive, which allows EU countries to treat several legally separate entities as a single taxable person if they are closely linked financially, economically, and organizationally. 

The document essentially highlights the Commission’s understanding of how the VAT group option should operate within the EU's single market, as well as the measures EU countries may introduce to prevent its misuse.

Sweden National VAT Rules

Regarding the national VAT rules, ECJ noted that Sweden implemented the VAT Directive through its 1994 Law on Value Added Tax, which mirrors the EU rules on when VAT applies and who must pay it. Furthermore, the ECJ outlined articles from Swedish VAT Law that transpose the key provisions of the EU VAT Directive.

Importance of the Case for Taxable Persons

The so-called Skandia case is considered one of the most influential ECJ rulings, as it clarified the VAT treatment of cross-border intra-group services. Given the context of VAT groups and structures in international businesses, this case affected many industries and companies, including banks and insurance companies. Essentially, the ECJ's interpretations provide greater legal certainty for VAT planning, compliance, and reporting for multinational groups, especially those operating through VAT groups and branches.

Analysis of the Court Findings

The ECJ noted that, under EU rules, any service provided for payment within an EU country by a taxable person is generally subject to VAT. Since the definition of taxable persons, as individuals or businesses who independently carry out economic activities, is critical to how EU-wide VAT rules are applied, the ECJ underlined that it must be applied autonomously and consistently across all EU countries.

Furthemore, the ECJ added that, under the established case law, for a service to be taxable, there must be a genuine legal relationship between the supplier and the recipient, marked by an exchange of reciprocal performance. The key question in determining whether a non-EU company and its EU-based branch have a relationship is whether the branch conducts its activities independently.

In this case, the ECJ determined that, since it does not bear its own economic risks, has no capital of its own, and all of its assets legally belong to SAC, the Swedish branch lacks the required independence to be treated as a separate taxable person. In other words, the Swedish branch operates entirely under the control of its head office located in the USA.

Concerning the exchange of internal invoices between the SAC and its Swedish branch, the ECJ held that such arrangements are not the product of negotiations between independent entities and therefore cannot establish a taxable relationship. What matters is that the Swedish office is part of the Skandia VAT group, formed under Article 11 of the EU VAT Directive. 

As a consequence of being included in the group, the branch, together with all other members, constitutes a single taxable person for VAT purposes and is treated as such by the national Tax Authorities. Since the VAT group is treated as a single taxable person, individual members cannot submit separate VAT returns or be recognised as separate taxable persons for VAT purposes, either within or outside the group.

Regarding the second question, the ECJ recalled Article 196 of the EU VAT Directive clarifies that, as an exception to the general rule in Article 193, which makes the supplier responsible for VAT, the recipient is liable for VAT when the services covered by Article 56 are provided by a taxable person who is not established in the EU country where VAT is due. Furthermore, the ECJ confirmed that the transactions in question are taxable without any doubt, and that the recipient of those services is the VAT group to which the branch belongs. 

Courts Final Decision

In the end, the ECJ ruled that, under EU law, services supplied by a company’s main establishment outside the EU to its branch in an EU country are taxable when that branch belongs to a group treated as a single taxable person for VAT purposes. Notably, when the branch is part of a VAT group, the group itself, as the purchaser or recipient of the services, not the branch as an individual entity, is liable for the VAT.

Conclusion

In the Skandia case, the ECJ held that a VAT group was a separate taxable person, distinct from its members for VAT purposes, and that supplies into a VAT-grouped Swedish branch from its US-headquartered entity were subject to VAT. With its ruling, the ECJ emphasized that membership in a VAT group centralizes VAT obligations and liability, affecting how taxable persons must manage intra-group and cross-border service supplies.

Source: Case C‑7/13 -  Skandia America Corp. v Swedish Tax Authority, Case C‑812/19 - Danske Bank v Swedish Tax Agency, EU VAT Directive