Below I have outlined what a VAT fiscal unity (Umsatzsteuer-Organschaft) is, what advantages it offers, the conditions under which it arises, and the new possibilities arising from a recent ruling of the Federal Fiscal Court (Bundesfinanzhof, BFH).
1. What is a VAT Fiscal Unity?
As a rule, legally independent companies are also treated as independent enterprises within the meaning of the VAT Act (Umsatzsteuergesetz, UStG). Under a VAT fiscal unity (Umsatzsteuer-Organschaft), several legally independent companies (Organgesellschaften - controlled entities) are combined under the direction of a controlling entity (Organträger) into a single VAT group and form only one enterprise within the meaning of the UStG.
2. What are the advantages of a VAT fiscal unity?
Supplies within the VAT group are not subject to VAT. This is particularly interesting where companies in the group carry out VAT-exempt supplies that exclude input tax deduction and receive supplies from other companies within the group.
Example: A GmbH, B GmbH and C GmbH operate exclusively residential property lettings (VAT-exempt, no input tax deduction). Management D GmbH provides management services to all 3 companies (property management, tenant sourcing, etc.). For this it receives an annual fee of 100,000 EUR.
a. There is no VAT fiscal unity. The fee must be charged plus VAT of 19% = 19,000 EUR. The VAT represents a real cost burden for A, B and C GmbH, as they have no right to deduct input tax. Management costs amount to 119,000 EUR.
b. There is a VAT fiscal unity. The fee is charged without VAT. Management costs amount to only 100,000 EUR.
3. What conditions must be met for a VAT fiscal unity?
A VAT fiscal unity arises without any specific agreement or application, provided all of the following conditions are met in their entirety:
- The controlled entity is financially integrated into the controlling entity's business. Specifically, this means that the controlling entity holds, directly or indirectly, the majority of voting rights in the controlled entity.
- The controlled entity is economically integrated, meaning that there are more than merely insignificant economic relationships between the controlled entity and the controlling entity.
- The controlled entity is organisationally integrated, which as a rule means an interlinking of the management of the controlling entity and the controlled entity.
Previously, a further condition was that controlled entities could only be corporations, i.e. GmbH or AG. The BFH has now lifted this condition by ruling dated 2 December 2015 (case reference V R 25/13), as it was incompatible with European law.
4. What new possibilities arise from the BFH ruling of 2 December 2015?
Now, for example, GmbH & Co KG entities may also be controlled entities. In all cases where the VAT fiscal unity failed solely because the controlled entities were not corporations, companies can now rely on the existence of a VAT fiscal unity and the fact that supplies within the VAT group are not subject to VAT. This applies retrospectively to all years for which the VAT assessment is still capable of amendment under procedural law. This has enormous practical relevance, as many companies in the property sector are structured in the legal form of a GmbH & Co KG.