How the European Court influences corporate structures

In mid-September the European Court gave an important judgment (C-7/13 Skandia America Corporation dated 17 September 2014) which will also affect Swiss groups. Specifically, it concerned an international financial service provider, which with its US company operated a branch in Sweden. The Swedish branch of the US company was a member of the VAT group formed by the Swedish affiliates. The task of the branch was to combine into one product the IT services procured from the American parent with services purchased externally. This final product was made available to the affiliated companies within or outside of the VAT Group.

In dispute was whether the services rendered by the US company (from the EU standpoint a third party country) to the branch constitute taxable turnovers, if the branch is a member of a VAT group in this member state. On this issue the European Court concluded that the service is provided not to the branch, but to the VAT group. Looked at in this way, the US company and the branch can no longer be treated as one taxable person.  The result is that the VAT group (not the branch) has as recipient of the taxable services to tax the services procured.

In this way the Court clarifies that a difference exists between branches within and outside a VAT group. Given that there is freedom of choice, it has to be examined whether it makes sense to admit the branch into the group. If it is not a member, VAT would not be payable on the services procured. On the other hand the charges to members of the group would have to be invoiced with VAT.

For once the European practice is closing on the practice in Switzerland. In Switzerland branches are always treated as independent taxable persons in their international transactions and that regardless of whether they are a member of a VAT group.