On September 17, 2014, the European Court of Justice (ECJ) rendered its judgment in high-profile case C-7/13 upon request for a preliminary ruling in the proceedings Skandia America Corp. (USA), filial Sverige vs. Skatteverket, the Swedish tax authority.

The ECJ upheld the Swedish tax authority´s position, against the Advocate General M. Wathelet´s view expressed in May 2014, that supplies of services from a non-EU based corporation to its branch in a EU Member State constitute taxable transactions when the branch is grouped in the EU Member State for VAT purposes. The ECJ further found that the VAT group was liable for the value added tax payable under these circumstances.

According to the ECJ´s findings, Skandia America Corp, a US arm of the Swedish insurance group, ‎was the global purchasing company for IT services and distributed some of these externally-purchased IT services to its own Swedish branch. The branch was grouped for Swedish VAT purposes with other Swedish businesses of the Skandia group. After further processing, the Swedish branch then supplied `IT-production´ further within and beyond its VAT group.

The group had taken the legal position that no VAT applied to the supply of IT services from the US to the Swedish branch on the grounds that these were intra-personal supplies within one and the same legal entity. That position has now been refuted by the ECJ. An appeal is not possible.

The decision of the ECJ may be especially harmful for financial institutions like banks or insurers which have outsourced IT and other services under similar circumstances. Financial institutions often cannot claim input VAT refund in the EU, so any VAT arising creates extra costs. VAT costs would range between 15% and 27% of the value of the outsourced services, depending on the national VAT rate where the branch is located. Other industries may also be affected.

US and other non-EU corporations should consider to review their exposure due to outsourcing arrangements and/or their supplies to European branches. EU corporations, although not mentioned explicitly in the decision of the ECJ, should also review the decision´s legal implications on their business model if they operate branches in a different EU member state.