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CJEU Advocate General opines on EU VAT cost sharing exemption

Executive summary

On 1 March 2017, the Court of Justice of the European Union (CJEU) released two Advocate General (AG) Opinions on the operation of the EU Value Added Tax (VAT) cost sharing exemption (CSE).

EU Member States have interpreted and implemented the CSE rules differently, leading to complexities, particularly where services flow cross-border.

In summary, the AG has, among other points, opined that the CSE cannot apply to financial services institutions and that the exact reimbursement test is automatically failed where transfer pricing requires a ”mark-up.”

Detailed discussion

The Advocate General’s opinions

The CSE exempts services from a designated provider to its ”members,” which must be taxpayers with exempt and/or non-business activities. These services must be ”directly necessary” for each member’s exempt/non-business activities and must also be delivered at cost under the ”exact reimbursement” criterion.Finally, application of the CSE cannot produce a ”distortion of competition.” Because of these complex criteria, taxpayers have been left with uncertainty around how and where the exemption can apply.

In the Latvian case of DNB Banka (C-326/15) and the Polish case of Aviva (C-605/15), the AG has responded to the list of questions designed to clarify CSE use as follows:

  • The CSE provider does not need to be a separate legal person but it must be a ”taxable person” in its own right.
  • The CSE should only apply to services supplied to businesses whose activities fall under Principal VAT Directive Art 132(1). This list does not include financial services which are listed elsewhere.
  • The application of a transfer pricing ”mark-up” means that the ”exact reimbursement” test is not met.
  • CSE groups should not operate cross-border. This is on the basis that they would be difficult to manage from a practical and legal perspective and may also lead to a loss of VAT revenue.

The Opinion in Aviva also discusses the ”distortion of competition” criterion, but notes that its application is a matter for national courts.

In reaching her conclusions, AG Kokott places importance on the fact that the CSE sits in the list of exemptions for ”activities in the public interest” rather than the list of other exemptions. She also suggests that as VAT grouping is available to Member States, difficulties regarding the interaction of transfer pricing and ”exact reimbursement” can be avoided.

Other ongoing case law in this area

In October 2016, AG Kokott also opined that various aspects of Luxembourg’s CSE rules were incompatible with EU law. In particular, she argued that Luxembourg’s CSE was too generous, resulting in an over-recovery of VAT and too many services benefiting from the exemption.

In addition, infringement proceedings launched by the Commission against Germany in relation to the CSE were heard by the CJEU in February 2017. This challenge results from the narrow implementation of the German CSE which is currently limited to those operating in the health and welfare sector. These proceedings have a clear overlap with the DNB Banka and Aviva cases.


Should these Opinions be followed (either in full or in part) by the Court, the benefits of the CSE are likely to be reduced significantly and especially so for financial services providers.

From a UK perspective, use of the CSE is not commonplace. This is due to both the uncertainty around its operation as well as the widespread use of VAT grouping. However, businesses have begun to focus on the CSE as a response to various developments, including potential changes to VAT grouping as a result of the CJEU’s decision in Skandia.

The CSE is used extensively in a number of EU Member States, including France and Luxembourg. Where the CJEU follows these Opinions, taxpayers should consider the impact of any potential withdrawal of the CSE and any alternative options that may be available. This is likely to include discussions around the introduction of VAT grouping in those jurisdictions which are yet to implement the relevant provisions into their national law.

EYG no. 00997-171Gbl

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