VAT Exemptions for Independent Groups and Shared Services: Insights from the ECJ

Cases C‑379/24 and C‑380/24, which were joined by the decision of the Court of Justice of the European Union (ECJ) President in July 2024, explore pivotal questions about the limits of VAT exemptions for services supplied by independent groups, raising significant concerns about the balance between national rules and EU law. 

Both cases concern similar cooperative arrangements established in Spain to centralize and professionalize cleaning services for their members, where the disputes arose from the Tax Authorities’ conclusions regarding the manner in which those services were organized and charged for VAT purposes.

Background of the Case 

The first case concerns Agrupació de Neteja Sanitària (ANS), established in 2017 as an economic interest group to provide shared cleaning infrastructure for hospitals, healthcare centers, and other buildings in which its members conduct healthcare and social care activities.

The second case concerns the company Educat, formed in 2010 as a Limited Catalan Cooperative Society, which pursued the same objective in the education sector by providing shared cleaning services for facilities used by its members, such as nurseries, schools, and vocational training centers. What these two cases have in common is that the entities themselves did not directly manage the day-to-day employment of cleaning staff. 

Instead, these companies contracted with specialized third parties to handle staff management, and those subcontractors were responsible for assigning workers to specific sites and tasks, recruiting and selecting staff, preparing payroll, managing employment issues, including termination, providing legally required training, and supplying the necessary materials. 

The main reason for contracting with subcontractors was their expertise, experience, and resources needed to efficiently manage cleaning services on behalf of the companies and their members. Following the tax audit, the Spanish Tax Authority determined that both ANS and Educat were liable for VAT on the cleaning services they supplied to their members, adding that the VAT exemption provided for in the VAT Law did not apply because Educat and ANS did not themselves directly provide the cleaning services. 

The Tax Authority determined that external subcontractors performed a substantial portion of those services and that cleaning services were not directly and exclusively linked to the VAT-exempt activities of the members, adding that granting a VAT exemption would distort competition. 

In both cases, the companies appealed the Tax Authority's decision. Nevertheless, the Regional Tax Tribunal of Catalonia upheld the Tax Authority's decision, prompting both ANS and Educat to challenge it before the High Court of Justice of Catalonia. In their appeals, companies argued that the VAT exemption should not be denied merely because staff management had been outsourced to third-party undertakings, since such outsourcing, from their perspective, is consistent with the objective and purpose of the exemption.

Main Questions from Request For Ruling

The first question asks whether a national provision that limits the VAT exemption to services provided “directly and exclusively” to an exempt activity is compatible with EU law, specifically with the purpose and scope of the exemption in Article 132(1)(f) of the EU VAT Directive.

With the second question, the Catalan Court of Justice asked whether the national interpretation of the same article conflicts with EU law when it treats a lack of exclusivity in the provision of services as automatically distorting competition and, on that basis, refuses the exemption.

Applicable EU VAT Directive Article

For the purposes of answering the raised question, ECJ outlined Recitals 25 and 35 of the EU VAT Directive, which state that the taxable amount for VAT should be harmonized across the EU so that taxable transactions produce comparable outcomes in all EU countries, and that VAT exemptions should be defined commonly and uniformly, respectively.

Additionally, the ECJ highlighted the importance of Article 131, which permits EU countries to lay down conditions for the application of exemptions, but only to ensure their correct and simple application and to prevent evasion, avoidance, or abuse. 

Also, Article 132, which states exemptions for activities in the public interest, including hospital and medical care, and closely related activities, the supply of services by independent groups to their members where those services are directly necessary for members’ VAT-exempt activities, and the provision of children’s or young people’s education, was noted as essential.

Spain National VAT Rules

With respect to the national VAT Law, Article 20(1) was identified as the most significant provision. This Article provides that certain services supplied directly to members by associations, groups, or autonomous entities, including economic interest groups, are exempt from VAT, but only if the members exclusively carry out a VAT-exempt or non-taxable activity and VAT is not deductible on that activity. Notably, the Article sets forth two conditions that must be met for the exemption to apply.

Importance of the Case for Taxable Persons

Since these cases concern VAT exemptions and the extent to which EU countries may impose national conditions on such exemptions, rooted in EU law, particularly for cost-sharing and cooperative arrangements, taxable persons that rely on shared service models may find ECJ interpretation particularly important. Understanding ECJ reasoning enables taxable persons to design cooperative service models without incurring unexpected VAT exposure and to protect themselves from inconsistent treatment across the EU.

Analysis of the Court Findings

Regarding the first question, the ECJ's preliminary point was that Recitals 25 and 35 of the EU VAT Directive show that the directive aims to harmonize VAT assessment across the EU, and that VAT exemptions are independent EU concepts that must be understood in the broader context of the common VAT system. To interpret the applicable provisions accurately, it is necessary to consider not only the literal wording of the provision but also its context and the objectives of the rules of which it forms part.

Taking that into consideration, and looking at the wording of Article 132(1)(f), the exemption applies when the services are directly necessary for performing the exempt activity, when the groups only charge members for their exact share of joint expenses, and when granting the exemption is not likely to distort competition.

The ECJ noted that the EU case law establishes that the terms defining VAT exemptions in Article 132 must be interpreted strictly. The main reason for this is that these exemptions are exceptions to the general rule that all services supplied for consideration by a taxable person are subject to VAT. Nonetheless, the ECJ added that strict interpretation cannot undermine the purpose of the exemptions or render them practically inapplicable.

From that perspective, Article 132(1)(a) to (q) generally lists exempt transactions, whereas Article 132(1)(f) is more specific, covering services supplied by independent groups to their members, where those members carry out VAT-exempt activities or are non-taxable persons, and where the services are directly necessary for that activity. However, the provision does not require that these services be strictly essential to a particular transaction or to the exempt activity itself.

The ECJ noted that another provision, Article 134(a), clarifies that the exemptions listed in Article 132(1) apply only if the supply of goods or services is essential to the exempt transactions. Nevertheless, the services covered by Article 132(1)(f) are not included among those listed in Article 134(a). The Advocate General (AG) also pointed out this fact, concluding that services under Article 132(1)(f) need not be highly specific or constitute an indispensable contribution to the exempt activity or any particular exempt transaction. 

In contrast, services that do not directly contribute to carrying out the exempt activity in question but instead serve other exempt activities cannot benefit from the exemption in question. Such an interpretation aligns with the provision’s overall purpose, which is to exempt certain public-interest activities from VAT to make goods and services more accessible and to avoid increased costs resulting from taxation. 

Regarding the second question, the ECJ noted that, under the national law at issue, the VAT exemption requires that services supplied to members of independent groups be used directly and exclusively for the exempt activity and be necessary for it. Additionally, the ECJ highlighted that the Spanish Government argued that the exclusivity requirement in national law is meant to ensure that the rule on avoiding distortion of competition, as set out in Article 132(1)(f), can be applied clearly and consistently.

On that basis, the ECJ sought to examine whether an EU country, subject to the condition that the exemption must not distort competition, could, by national legislation, limit the supply of services eligible for the VAT exemption. The ECJ also noted that EU countries are not obliged to do so, provided that the exemption does not distort competition or limit the supply of services eligible for VAT exemption under national law.

Moreover, national authorities may establish rules to facilitate the management and supervision of the exemption. However, when doing so, they must ensure the correct and straightforward application of the exemption and prevent evasion, avoidance, or abuse, without redefining the actual scope or content of the exemption itself. 

In this case, Spanish legislation excludes all services supplied by independent groups that can be used for activities not exclusively linked to members' exempt activities. Given that the exemption is designed to support public-interest activities by keeping the cost of services and goods down, thereby facilitating access to them, denying the exemption to an independent group solely because its services are general in nature and could be supplied to others would improperly narrow the scope of the exemption.

Courts Final Decision

In the case of the first question, the ECJ ruled that Article 132(1)(f) must be understood as preventing national laws from denying the VAT exemption to services supplied by independent groups when those services are necessary for a VAT-exempt activity, even if they are not exclusively linked to that activity due to their general or broad nature.

Concerning the second question, the ECJ clarified that national legislation cannot automatically treat such services as distorting competition merely because they might also be used for taxable activities. More specifically, the exemption cannot be denied solely on the basis of a general presumption that the general nature of the services creates a competitive risk.

Conclusion

From a practical perspective, ECJ's ECJ reasoning and conclusions provide greater legal certainty for taxable persons and exempt entities that rely on shared services or cost-sharing structures to support their activities. Notably, the ruling explains that commonly outsourced or general services, such as cleaning or administration, may still fall within the VAT exemption framework when they play a functional role in exempt activities.

Source: Joined Cases C‑379/24 and C‑380/24 - Agrupació de Neteja Sanitària, AIE and Educat Serveis Auxiliars SCCL v Regional Tax Tribunal, Catalonia, EU VAT Directive