A VAT group offers significant advantages in centralised tax processing, particularly for corporate groups. In this article, you will learn what a VAT group is, what requirements businesses must meet to qualify for one, and what value-added tax (VAT) consequences it entails. We also explain the advantages and disadvantages of a VAT group.

What’s in this article?

• What is a VAT group?
  
• What requirements must be met for a VAT group to be formed?
  
• What are the tax consequences of a VAT group?
  
• What are the advantages of a VAT group?
  
• What are the disadvantages of a VAT group?
  
• Advantages and disadvantages of a VAT group at a glance
  

What is a VAT group?

A VAT group is a special tax construct in German VAT law (UStG). It describes an arrangement in which several legally independent businesses form a tax group. In this group, individual businesses, called parent companies, become the main tax contacts for the VAT liability of all businesses involved. The other businesses, referred to as subsidiary companies, become financially, economically, and organisationally integrated into the company of the controlling entity and are not independent for VAT purposes (see Section 2, Paragraph 2, No. 2 of the VAT Act). Only the parent companies are entrepreneurs in terms of VAT. Therefore, only they receive a tax number for VAT purposes.

All entrepreneurs can become a parent company: sole proprietors as well as partnerships or corporations. By contrast, subsidiary companies can be only partnerships and corporations. The tax authority designates the totality of all legally independent businesses that form a VAT group as a consolidated tax group.

What requirements must be met for a VAT group to be formed?

The pre-requisite for a VAT group is the financial, economic, and organisational integration of the subsidiary companies into the company of the controlling entity:

• Financial integration: Financial integration describes the financially dependent relationship between a parent company and subsidiaries. It forms the basis for the tax consolidation and ultimately for the recognition of a VAT group. Without this, it is not possible to adequately fulfil the other conditions (i.e. economic and organisational integration). What is key is that the parent company holds the majority of shares in the subsidiary companies and can direct the subsidiary companies through majority decisions. In this way, parent companies can control and influence important and operational decisions. Provided the shareholding ratios correspond to the voting rights ratios, financial integration exists if the parent company holds more than 50% of shares in the subsidiary company.
  
• Economic integration: Economic integration describes the economic connection and interrelationships between the controlling entities and the subsidiary companies. It ensures parent companies integrate subsidiary companies into the company of the controlling entity such that they cannot act independently but instead form an economic unit with them. Typically, there are close supply, service, or dependency relationships between the businesses. This might be the case, for example, if a subsidiary produces components that are exclusively delivered to the parent company (i.e. the controlling entity) for further processing. Because the subsidiary company in this case has no other customers, its existence depends on the demand of the parent company.
  
• Organisational integration: Organisational integration is the third key pre-requisite for a VAT group. It describes the close organisational connection between a parent company and its subsidiaries and ensures the former are able to control and manage the latter at management level. This is usually done through personal connections, such as when individuals who also hold managerial positions at the parent company carry out the management or other executive duties of the subsidiary companies. However, the management of the parent company does not necessarily have to be identical to the management of the subsidiary companies in terms of personnel. Multiple gradations are possible. The decisive factor is that there is close co-ordination and that the parent companies can influence the fate of the subsidiary companies.
  

Can you choose whether to form a VAT group?

If you meet those three conditions, your organization will automatically be a VAT group – there is no right to vote. Depending on whether a group of businesses organised in this fashion desire a tax group with regard to VAT, the businesses involved have the opportunity to shape the economic and organisational integration within a certain framework.

What are the tax consequences of a VAT group?

A VAT group has several significant tax consequences for the businesses involved:

• VAT unit: A parent company and its subsidiaries are effectively a single unit for VAT purposes, meaning only the parent company appears as a company to the tax office and pays VAT for all sales within the group.
  
• Centralised tax declaration: Parent companies must centrally declare the VAT for all subsidiaries. At the appropriate time, a business should file a joint VAT return for the group. A parent company should also carry out input tax deduction centrally, meaning the tax authority takes into account the input tax deduction from input services of the subsidiary companies in the VAT return of the controlling companies.
  
• No VAT for internal services: Services between the parent company and the subsidiaries as well as services between subsidiaries are considered internal services. Because internal services take place within a tax unit, they are non-taxable. Therefore, no sales tax is levied on these internal services.
  
• Joint and several liability: The controlling entities are liable for the VAT liability of the group. This lets the tax office collect a VAT claim from the parent company resulting from the transactions of a subsidiary company.
  

Changes in financial, economic, or organisational integration can lead to the termination of the tax group, which has tax consequences for the businesses involved. In addition, judgments and changes in legislation affect the requirements and consequences of VAT group membership. Therefore, businesses that belong to a tax group should regularly review their structures and pay close attention to taxation.

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What are the advantages of a VAT group?

A VAT group offers several advantages that can be particularly attractive for businesses with complex structures and multiple subsidiaries. Here is an overview of the key benefits:

• Liquidity advantage: Because the tax authority does not levy VAT on internal services, there is no need to pre-finance VAT for these internal business transactions. This can improve the liquidity of the businesses involved.
  
• Simplified administration: Because a parent company processes VAT for the group, the businesses have to submit only one sales tax return, which reduces administrative effort and expense. Accounting processes become more simplified, letting the businesses save time and money.
  
• Optimisation of tax liability: By combining into a single tax entity, businesses can better co-ordinate and optimise tax liabilities and claims. If one group business has input tax credits and another has VAT liabilities, the group can offset these. This can reduce the risk of tax debt and contribute to more efficient tax planning.
  
• Optimisation of input tax deduction: Businesses organised into a VAT group can avoid the creation of non-deductible input tax if individual businesses in the group are not entitled to full input tax deduction but service relationships still exist within the group. For example, in the care sector, businesses can exempt many services from VAT, which means businesses in this sector often cannot make full use of the input tax deduction if they operate independently. Through the group structure, the care business can claim the input tax deduction for all affiliated businesses if it is the parent company. Even if the care services are exempt from VAT, the associated services – for example, administration, cleaning, or catering – can deduct input tax more efficiently because the businesses are a single unit for tax purposes. This reduces the tax disadvantages that could arise from the VAT exemption of individual services.
  
• Better planning: Businesses can consolidate tax planning through a VAT group and achieve greater certainty in the planning process. They can also adapt their structure if their legal or business conditions change.
  
• Uniform external presentation: The VAT group lets all businesses in the group present themselves uniformly to outsiders. Because the group is effectively a single tax entity, key advantages are possible – for example, in negotiations with suppliers and customers.
  

What are the disadvantages of a VAT group?

Although a VAT group offers many advantages, there are disadvantages to consider:

• Joint and several liability: Parent companies are liable for the entire sales tax of the tax group, including the tax debts of the subsidiary companies. If a subsidiary company gets into financial difficulties or provides incorrect information, the tax office can hold the parent company liable for the tax debts. This means the controlling entities must be responsible for liabilities they did not directly cause.
  
• Tax risks caused by misinterpretation: Errors in the interpretation of the requirements for a tax group can entail considerable tax risks. For example, the tax office could demand a refund of input tax or subsequently classify internal sales as taxable.
  
• Complex administration: Though the central tax return brings advantages for the tax group, the administration becomes more complex, especially when there are many tax groups. The parent companies must monitor the VAT transactions of all businesses and ensure those businesses include all relevant data in the central tax return. This can be complex and time-consuming, especially for larger corporate groups. In this case, we recommend professional support such as Stripe Tax to correctly record and report all taxes.
  
• Reversal upon termination of the group: If the requirements for a tax group are no longer met, the tax authority will automatically terminate the tax group. This can lead to a complex reversal process in which internal services become subject to tax retroactively and input tax corrections must take place.
  
• Complex legal situation: The legal requirements and prerequisites for a VAT group are complex and subject to constant changes through case law and legislation. Businesses must therefore ensure they meet all the requirements for a VAT group. This requires continual monitoring and, if necessary, adjustment of the business structure.