VAT Group (Umsatzsteuerliche Organschaft): Requirements, Benefits and Practical Tips

• A VAT group (umsatzsteuerliche Organschaft) combines legally independent companies into a single entrepreneur for the purposes of VAT law.
• Internal supplies between the participating companies are not subject to VAT, which can result in liquidity advantages and less administrative work.
• The requirements for a VAT group are the financial, economic and organisational integration of the controlled company (Organgesellschaft) into the controlling company (Organträger) – all three characteristics must be present cumulatively.
• The VAT group arises by operation of law where the requirements are met, but it also entails joint and several liability of the controlling company, which should be considered in advance.

What is a VAT group?

A VAT group (umsatzsteuerliche Organschaft) exists where a legal person (the controlled company, Organgesellschaft) is financially, economically and organisationally integrated into another business (the controlling company, Organträger). For VAT purposes, the controlling company and the controlled company (or companies) are then treated as a single business – the controlled company loses its independence for VAT purposes, even though it remains a separate entity under civil law.

The key legal consequence is that supplies of goods and services between the controlling company and the controlled companies are treated as non-taxable internal supplies – no VAT arises in this respect, and no invoices showing VAT are required. Externally, only the controlling company appears as the taxable person: it reports all the supplies of the entire VAT group in a single preliminary VAT return and annual VAT return and pays the VAT centrally.

At least two parties are always required for a VAT group:

• Controlling company: The superior business that appears externally on behalf of the entire group of companies. Any business within the meaning of VAT law can act as the controlling company – sole traders, partnerships or corporations.
• Controlled company: The one or more companies that meet the integration requirements. Corporations are regularly eligible as controlled companies – but, subject to certain conditions, partnerships have also been capable of inclusion for some years now.

What requirements must be met for a VAT group?

For a VAT group to be assumed, the controlled company must be financially, economically and organisationally integrated into the controlling company's business for VAT purposes – if one of the three characteristics is missing, no VAT group arises.

• Financial integration: The controlling company must hold, directly or indirectly, the majority of the voting rights in the controlled company, so that it can enforce its will within the controlled company. A shareholding carrying more than 50% of the voting rights is regularly sufficient for this purpose.
• Economic integration: The controlling company and the controlled company must be economically related to one another, for example because the controlled company provides intermediate products, services or infrastructure to the controlling company, or conversely because there is a close interlinking of their business activities. Compared with financial integration, this requirement is typically the most broadly framed and causes the fewest problems of delineation in practice.
• Organisational integration: The controlling company must actually control the controlled company, that is, be able to enforce its will in the day-to-day management. In practice, this is usually ensured by identity of persons at management level or at least by a right to issue instructions to the management.

All three integration characteristics are examined by the tax authorities as part of an overall assessment, whereby individual characteristics may be less strongly pronounced as long as the remaining characteristics compensate for this. In practice, it is advisable to document organisational integration with particular care, since it is regularly the focus of tax audits (Betriebsprüfungen) and formal defects – such as a missing power to issue instructions in the articles of association – can quickly lead to the VAT group being denied.

In the case of holding companies in particular, which provide management services to the operating portfolio companies, financial integration already exists from the point of acquisition. The management services provided to the portfolio company give rise to economic integration. If, for example, the managing director or an employee of the group holding company temporarily takes over sole management of an operating company, organisational integration is also present, which leads to a VAT group.

Does a VAT group make sense?

Whether a VAT group is advantageous depends largely on the structure of the group of companies and on the volume of internal supplies.

Advantages

• Liquidity advantage: Since internal supplies are not subject to VAT, no VAT has to be pre-financed on intra-group services – this is particularly advantageous where a company within the VAT group is not entitled, or only partly entitled, to deduct input VAT, for instance in the case of holding companies or businesses with VAT-exempt output supplies.
• Less administrative work: Since only a single preliminary VAT return and annual VAT return has to be filed for the entire VAT group, the filing burden is noticeably reduced compared with separate returns for each individual company.

Disadvantages

• Joint and several liability: Set against these advantages is the fact that the controlling company is liable for all VAT debts of the entire VAT group – errors or tax arrears of individual controlled companies therefore have a direct impact on the controlling company.
• Limited flexibility: Since the VAT group arises by operation of law as soon as the requirements are met, it cannot be „switched on and off" at will – changes to the shareholding or group structure can therefore unintentionally lead to a VAT group ceasing to exist or coming into existence.

A VAT group is particularly recommended for groups of companies with a high volume of internal supplies and limited input VAT deduction at individual companies, for example in the real estate, financial or healthcare sector. It is less suitable where the participating companies are predominantly fully entitled to deduct input VAT and exchange hardly any internal supplies – here the administrative advantage bears no reasonable relationship to the liability risk and the limited flexibility.

What tips are there for the VAT group?

Since a VAT group is not established by way of an application but arises automatically where the requirements are met, the practical focus is on the ongoing safeguarding and documentation of the integration characteristics.

• Regular review: Shareholding, management and contractual structures should be reviewed regularly to establish whether the requirements of the VAT group continue to be met – in particular in the event of restructurings, changes of shareholders or changes in the management.
• Clean documentation: Organisational integration should be documented by means of clear contractual provisions and provisions in the articles of association (managing director agreements, a control agreement, rights to issue instructions, rules of procedure, group guidelines, employment contract; see section 2.8 para. 10 sentence 3 UStAE) in order to avoid difficulties of proof in the course of a tax audit.
• Adjust invoicing: Invoices between the controlling company and the controlled companies should be issued without showing VAT, since they concern non-taxable internal supplies – if a document with separately stated VAT is nevertheless issued inadvertently, it does not count as an invoice for VAT purposes but as an internal accounting document; the VAT stated in it is not owed under § 14c Abs. 2 UStG.
• Early termination planning: Since a VAT group can also end unintentionally, for example through the sale of shares, planning should be undertaken at an early stage as to how VAT is to be handled between the formerly affiliated companies after a termination.

Anyone who keeps these points in mind from the outset can make use of the advantages of the VAT group without being taken by surprise by an unexpected denial or termination. A regular tax review of the group structure is therefore worthwhile even after the VAT group has first been established.