Last Fall, the European Court of Justice (ECJ) held that Skandia America Corp. was liable for the VAT on supplies of services to its Swedish branch. Sverige v. Skatteverket, C-7/13, September 17, 2014. In 2007 and 2008, Skandia America Corp. (SAC), a corporation organized in the U.S., served as the world-wide purchasing company for IT services for the Skandia group and carried out its activities in Sweden through its branch, Skandia Sverige. SAC distributed purchased IT services to various companies in the Skandia group and to Skandia Sverige which, since July 11, 2007, has been registered as a member of a VAT group.

Skandia Sverige then processed the externally purchased IT services to produce a final product, “IT-production.” The “IT-production” was then supplied to various companies in the Skandia group, both within and outside the VAT group. A 5% markup was charged on each supply of services, both between SAC and Skandia Sverige and between the latter and other companies in the Skandia group. Costs were allocated between SAC and Skandia Sverige by the issuance of internal invoices.

The Swedish tax authority (Skatteverket) assessed VAT on the supplies of IT services from SAC to Skandia Sverige for 2007 and 2008 based on its determination that the supplies provided constituted taxable transactions and considered SAC to be liable for VAT. Consequently, Skandia Sverige was identified as also liable for VAT and it was charged the tax relating to those supplies on the ground that it was SAC’s branch in Sweden.

In challenging the imposing of the Swedish VAT, Skandia Sverige brought an action against those decisions before the referring court. The Stockholm Administrative Court stayed the proceedings and referred two questions to the ECJ for a preliminary ruling: (1) whether supplies of services from a main establishment in a third country to its branch in a member state constitute taxable transactions when that branch belongs to a VAT group in the member state in which the branch is established; and, if so (2) whether the person liable to pay the VAT is the supplier (the main establishment in the third country) or the recipient (the VAT group in the member state) of the services. Thus, the EU court’s reasoning was that only the branch of an overseas company forms part of the single taxable person constituted by the relevant VAT group and that the overseas establishment of the company and its branch take on separate identities so that the overseas company remains capable of making a taxable supply of services to the VAT group of which that company, through its branch, is a member.

The ECJ noted that under the grouping provisions in Sweden, the main establishment of Skandia American Corporation and the VAT group were separate taxable persons and found, therefore, that the supplies in question constituted taxable transactions. Under the “reverse charge procedures” (Article 196 of the PVD), as the recipient of such services, the VAT group is liable for the VAT.

U.S. corporations with branches in EU member states should take careful note of this decision and there may be the possibility that the recent decision may pose a VAT trap for the unwary.