Austrian Supreme Administrative Court on VAT groups
In a court decision of 16 November 2021 (Ra 2020/15/0101), the Austrian Supreme Administrative Court (VwGH) confirmed that organisational integration exists if executive management is carried out by non-executive employees of a VAT group. Economic integration is also present in the specific case based on the lease of an administrative building to a bank. The overall circumstances of the case are decisive.
A bank, O AG, held 100% of the shares in the appellant via two subsidiaries. The appellant had building rights on a plot of land in the ownership of O AG, and constructed an administrative and events building on this plot in accordance with the instructions of O AG. On completion, the building was leased to O AG. The option to deduct input VAT on the construction costs was used based on the provisions of Section 6 para 2 Austrian VAT Act (UStG) in the version applicable prior to the 1st Austrian Stability Act 2012 (1. StabG 2012).
The business purpose of the appellant was the construction and lease of buildings to O AG. Since its incorporation, the appellant has only leased buildings to O AG. The appellant did not have its own office or employees. All necessary (administrative) work was carried out by the employees of O AG. The services provided were not charged for. The managing directors of the appellant were employees of O AG. The rental fee for the building included depreciation and interest components, but no profit component.
The matter in dispute was whether a VAT group existed in accordance with Section 2 para 2 UStG.
The VwGH confirmed the existence of a VAT group.
Financial integration was not part of the matter in dispute. Financial integration is also present in case of an indirect participation.
With regard to organisational integration, the VwGH notes that the crucial aspect is whether the controlling company is able to enforce its will; de-facto control is decisive. Based on the overall circumstances of the case, this was given in the case in question even if the executive management of the appellant was carried out by non-executive staff members of O AG. Factors included the calculation of the lease fee as well as the lease being made to O AG despite the possibility of a lease to unrelated third parties.
Concerning economic integration, the VwGH noted with reference to earlier case law that this exists if there is a reasonable business connection. In its decision of 23 November 2016, Ra 2014/15/0031, the VwGH decided that economic integration was given “if the task of the presumable member of the VAT group in the specific case as a property-owning company was primarily to provide the [bank] the required premises for the operation of its bank transactions”. This decision, however, provided no definition of “bank transactions” nor any limitation to bank transactions within the meaning of Section 1 para 1 Austrian Banking Act (BWG). Even office space that is used for training and marketing purposes can constitute premises for bank transactions, as the operation of a financial institution requires “many additional tasks (in particular back-office tasks) which support or even ultimately enable the operational core activity of bank transactions within the meaning of Section 1 para 1 BWG”.
Previously, the Austrian VAT Guidelines (UStR) had stated that for organisational integration to exist, the executive management of the controlled subsidiary company and the executives (authorised agents) of the controlling company would have to be carried out by the same individuals. In the case in question, the VwGH appears to have judged organisational integration to exist if executive management of the presumed VAT group member was exercised by non-executive employees of the presumed head of the VAT group on the basis of the overall circumstances of the case. In our view, it remains to be seen to what extent general conclusions may be drawn from these statements.
Of practical relevance from our perspective is the VwGH finding that a banking operation does not only encompass its direct core activity, but also various additional activities such as administration, which support or enable the core business. The VwGH thus seems to be developing a more liberal understanding of economic integration, which in our view contradicts (or is no longer aligned with) the more restrictive statements of the Austrian tax authorities in items 237 and 238 of the VAT Guidelines.