Until now, it was generally accepted that no VAT charge arose on such services. This is because there is no VAT charge on services supplied within a single legal entity.
However, the CJEU decision in the recent case (the taxpayer was Skandia America) ruled that such services may be subject to VAT in the country where the branch is located. This is because the accepted principle does not apply if the branch is part of a VAT group, since the branch is then treated as a separate legal entity from the headquarters. That means that a VAT charge could arise on the provision of such services.
The case could impact any scenario where an EU branch is part of a VAT group, and the headquarters is in another country (EU or otherwise). Most, but not all, EU member states allow for VAT grouping.
The CJEU also emphasised that a VAT charge would arise if the branch bears significant economic risk arising from its business, even if it is not part of a VAT group. Clearly, this requires a factual judgement to be made, and it may be worthwhile for companies to collect and retain evidence in relation to this issue with the aim of heading off a challenge by the appropriate tax authority.
Many financial services and insurance groups which have their headquarters outside the EU and have branches in the EU could be hit by the CJEU decision, resulting in costs that may reach millions of euros. The cost will arise because such groups, unlike most other businesses, cannot recover from the tax authorities VAT that they have to pay on supplies that they receive.
The most significant impact is likely to be in the UK due to the large financial and insurance sector in London. However, there is a question whether one might be able to distinguish the UK VAT grouping rules from those considered by the CJEU, in such a way that the recent judgment does not apply to the UK. The arguments here are finely balanced, and it is not yet clear what view HMRC will take.
What you need to do now
Any business with one or more EU branches should urgently consider whether it may now be assessed for VAT on historic services (either because of VAT grouping or because the branch bears significant economic risk). There may be room to argue that the CJEU judgment is limited to certain types of VAT grouping, and so does not apply across all EU countries.
Also, it may be worthwhile to consider whether it can mitigate any future VAT cost, perhaps by arranging for the branch to receive the services in house, or by arranging for the branch to leave the VAT group.