On the 11 March 2021, the ECJ ruled Danske Bank A/S, Danmark, Sverige Filial v. Sweden. The Dansk ECJ ruling confirmed that a Swedish branch of a Danish Bank, Danske, was a separate VAT body. This was because the Danish headquarters had opted to form a Danish VAT group. This excludes foreign offices, so meaning the Swedish branch is an independent taxable entity in Sweden. This is despite the economic reality of the Swedish entity being wholly reliant on the Danish office, and only being in existence to support its activities as a controlled party. The Danish entity must therefore charge VAT to its Swedish branch for the use of shared computer platform. Under the EU VAT exemption rules for financial services, this VAT is unrecoverable for the Swedish entity – so a loss.
This case underlines the need for the EU to accelerate its review of the VAT exemption for Financial Services. Banks and insurers are losing large sums because they have no right to deduct VAT charged to them outside of VAT groups, as will now happen following this latest ruling.
The exemption is a major distortion of the market, and places EU-based banks on an unfair footing with global competitors. The uncertainty, and clogged-up legal cases in the EU system, is not helpful in building an international industry. The UK’s aim to reform its financial services exemption post-Brexit will heighten this pressure for the EU. There are likely to be initial EU proposals in 2022 with the concerns that derailed the last attempt to impose VAT on financial services now removed with the UK gone.
Question referred to ECJ
Does a Swedish branch of a bank established in another Member State constitute an independent taxable person where the principal establishment supplies services to the branch and imputes the costs thereof to the branch, if the principal establishment is part of a VAT group in the other Member State, while the Swedish branch is not a member of any Swedish VAT group?