New Supreme Administrative Court Ruling on the Prerequisites for VAT Group Formation

The Supreme Administrative Court recently ruled on the prerequisites for establishing a VAT group. The case involved a group primarily engaged in the provision of VAT-exempt social and healthcare services. However, the parent company also offered VAT-exempt financial services to its subsidiaries, specifically credit provision and organization of financing.

The Supreme Administrative Court (the “Court”) denied the group the possibility of forming a VAT group. In its reasoning, the Court noted that while the parent company did provide VAT-exempt financial services internally within the intended VAT group, there was no significant provision of such services to external entities. According to the Court, the purpose of the Finnish Value Added Tax Act (the “VAT Act”) is to permit VAT grouping solely for companies that operate in financial and insurance sectors, including their controlled subsidiaries, to facilitate the provision of VAT-free support services. The Court highlighted that the VAT group formation would result in internal supplies being out-of-scope of VAT. This would effectively mean that after the formation of the group, the parent entity would no longer supply VAT-exempt financial services or it would supply them only to a minor extent.

The Court argued that allowing VAT grouping under these circumstances would dilute the industry-specific intention of the VAT group provision set out in the Finnish VAT Act, as this would mean VAT grouping being possible for entities in any industry as long as they supplied VAT-exempt financial or insurance services within the group. This would be against the purpose of the VAT grouping rule laid down in the Finnish VAT Act. Consequently, the parent entity did not qualify as primarily supplying VAT-exempt financial services, and the group did not meet the VAT grouping criteria.

The decision of the Supreme Administrative Court is in line with previous rulings, such as SAC:2014:31 and ECJ case C‑74/11, whereby the purpose of the Finnish VAT Act to restrict VAT groups to the financial and insurance sectors was upheld.

However, the Court's decision could pose challenges to businesses that predominantly supply services within their VAT group, potentially also leading to disputes over already existing VAT groups. The most problematic aspect of the reasoning is that the services supplied within the VAT group would not be considered when determining whether the controlling entity performs mainly VAT-exempt financial or insurance services. On the other hand, the decision does include a reference to the purpose of the VAT group rule set out in the Finnish VAT Act, which is to allow entities acting in the financial and insurance sectors to form VAT groups. This supports the view that the new ruling should not change the current interpretation of the prerequisites for forming a VAT group for companies operating in the financial and insurance sectors, even when they supply such services only or mostly within the VAT group.

Another problematic aspect of the ruling is that the Court bases its argumentation on the purpose of the VAT group rule as intended by the legislator rather than on the wording of the provision. In the case at hand, it can be questioned whether the wording of the provision is in line with the Court's interpretation, as Section 13a of the Finnish VAT Act does not refer to entities acting in the financial or insurance sectors, but to entities that supply VAT-exempt financial or insurance services.

The impact of this ruling on the current VAT group criteria remains to be seen.

If you have any questions about the ruling, please contact the undersigned or your regular Borenius contact.