The cost sharing exemption: when advocate generals disagree

In this journal ('Cost sharing: all shook up?', Tax Journal, 31 March 2017), we reported on the position taken by one advocate general (AG) in two opinions (DNB Banka (Case C-326/15) and Aviva (Case C-605/15) concerning the cost sharing exemption (CSE) in article 132(1)(f) of the Principal VAT Directive. This is an update of that article following the release on 5 April of another AG’s opinion on the same topic, in Commission v Germany (Case C-616/15).

 

 

The CSE is only 76 words long. Yet, unusually, the two AGs disagree completely on a number of issues, including a fundamental one: the scope of the exemption. Contrary to the opinions in DNB Banka and Aviva, in Commission v Germany, the AG considers that a cost sharing group (CSG) needs not be a taxable person and, most importantly for the financial sector, that this exemption does not apply only to supplies of services by a CSG to members with exempt activities in the public interest sector but can apply (subject to the other conditions being fulfilled) to supplies of services to members with any exempt (or non-business) activity. 

 

The EU Commission brought infraction proceedings against Germany because it has limited the scope of the CSE to supplies where members are doctors, exercise paramedical professions or carry on exempt activities in the hospital and medical care sector. Germany’s position is based on the wording, position, drafting history and objectives of CSE (the AG in DNB Banka and Aviva based her, albeit less restrictive, conclusions on similar arguments). 

 

The AG in Commission v Germany also uses a schematic, teleological and textual approach to the CSE but disagrees with Germany and the other AG. He affirms that the purpose of the exemption is to avoid members of a CSG having to pay irrecoverable VAT on services supplied by the CSG and this applies to any exempt or non-business activity of the members. Nothing in the text of the Directive or case law suggests the CSE should be restricted and the public interest heading of article 132 should not of itself limit the scope of the CSE to public interest exemptions. The CSE’s position in the Directive is solely the result of careless drafting and nothing more. 

 

Germany also supported its position on the basis of a general risk of distortion for all non-health CSGs. In Commission v Germany, the AG considers that an examination of whether a risk of distortion exists is required in each case, whether the CSG members are in the health sector or not. 

 

In summary, Germany limits the CSG exemption to the exempt health profession, the AG in DNB Banka and Aviva limits it to CSG members with exempt activities listed in article 132 and the AG in Commission v Germany concludes that it can apply to CSG members with any exempt activity. Three different conclusions based on the same arguments. You say tomayto, I say tomahto indeed! 

 

 

The AG also considers that a CSG is not a taxable person. In coming to that position, he first considers the concept of group, which does not necessarily have legal personality and may be based on a simple contractual agreement. He then compares the CSG with VAT groups and considers that, like VAT groups, CSGs are transparent. The Directive should therefore not have referred to CSGs’ supplies to their members as ‘exempt’ but should have excluded such supplies from VAT in the same way that intra VAT group supplies are disregarded. A mere recovery of a share of costs is, in fact, not a supply for VAT purposes. 

 

 

Those members of CSGs in the banking and insurance sectors will now wait expectantly for the CJEU’s judgment in these cases. Only one of the AGs can be right.