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April 20, 2021

Germany: CJEU rules that the VAT Directive precludes national rules prohibiting a partnership from VAT grouping

On 15 April 2021, the Court of Justice of the European Union (CJEU) released its decision in Case C-868/19 M-GmbH responding to a German referral on whether Article 11 of the European Union (EU) value-added tax (VAT) Directive1 is to be interpreted as precluding national legislation which prohibits a partnership (in this case a limited liability partnership, the partners of which, apart from the controlling company, are not exclusively persons financially integrated into the controlling company’s undertaking) from being a ”controlled company” and eligible for VAT grouping.


The case concerns a legal dispute between M-GmbH as the universal legal successor of PD GmbH & Co KG (PD) and the German tax office2 in relation to the VAT obligations of PD for December 2017. PD was founded in 2010 as a limited liability partnership. As of December 2017, it included A-GmbH as general partner, M-GmbH, D-GbR and individuals C, D and E as limited partners. According to PD's articles of association, each partner had one vote regardless of the amount of the compulsory contribution. Notwithstanding this, M-GmbH had six votes. With the exception of a few resolutions on the composition of the shareholders and on amendments to the articles of association that required unanimity, all of PD's resolutions were passed with a simple majority.

PD was economically and organizationally part of M-GmbH and there were extensive service relationships between them. PD concluded that from December 2017 it had been financially integrated into M-GmbH so that PD and M-GmbH formed a VAT group as a result of compulsory German VAT grouping rules. PD did not therefore submit an advance VAT return for that month.

In May 2018, the tax office assessed PD for the missing payment along with a late payment penalty on the basis that there was no fiscal unity creating a VAT group between PD and M-GmbH, since PD was not financially integrated into the latter. According to Section 2.8, Paragraph 5a, Clause 1 of the VAT Application Decree, a VAT group presupposes that the partners of the partnership in question are only persons who are financially integrated into the company of the controlling company. In the present case, the criterion of financial integration into the company of the controlling company was not met because PD's limited partners included not only a company with limited liability, but also individuals (or natural persons).

Article 11(1) of the EU VAT Directive allows persons who are legally independent, but who are closely linked by mutual financial, economic and organizational relationships, to be treated as a VAT group. The referring court had doubts as to whether the German rules are compatible with Article 11 of the VAT Directive as the national rules in effect only allow a partnership to form a VAT group with the company of the controlling company, if, in addition to the parent company, the partnership only has shareholders who are financially integrated into this company. According to settled European case law, Article 11(1) of the VAT Directive does not expressly provide for Member States to impose additional conditions on economic operators for persons who could be regarded as a VAT group, and in particular cannot require that only certain legal persons can belong to a VAT group.

A legal person under German law can only be regarded as financially integrated into the company of the controlling company, if the controlling company can enforce its will through a majority stake in the company in which the Resolutions are passed by a majority. German case law regards that condition as not fulfilled in the case of partnerships on the basis that these companies have the possibility of changing their articles of association in respect of the majority required. Therefore, the accession of partnerships to a VAT group is fundamentally excluded unless all the partners in the partnership, in addition to the controlling company, are persons who are themselves financially integrated into the controlling company's business. In such a situation, the controlling company directly or indirectly controls each partner so that he can enforce his will in the partnership, even if its resolutions must be passed unanimously.

Although it was common ground that M-GmbH, PD's controlling company, was able to impose its will on PD by means of decisions most of which were adopted by a majority, its shareholders included persons who were not financially integrated into M-GmbH. 

The referring court therefore asked whether the exclusion of PD from joining the VAT group is in line with the requirement of close links through financial relationships set out in Article 11 (1) of the VAT Directive or whether it is a measure which can be justified under the principle of prevention of tax evasion or tax avoidance.

The CJEU findings

The CJEU held that the Member States cannot use VAT grouping criteria relating exclusively to certain types of legal person to demonstrate the existence of a close link through financial relationships. In the absence of further requirements, the mere existence of close links between the persons belonging to a VAT group cannot lead to the assumption that the EU legislature intended to reserve the right to benefit from the VAT group regime solely to entities which are mutually exclusive and in a subordinate relationship to the parent company of the group of companies concerned. If such a subordination relationship exists, this allows the presumption that there are close connections between the persons in question, but it cannot in principle be regarded as a prerequisite for the formation of a VAT group (as held in the earlier CJEU case Larentia and Minerva3).

The CJEU held that M-GmbH was able to enforce its will with PD by means of decisions taken by a majority, so that close ties can be presumed to exist through financial relationships. The mere fact that PD's shareholders could theoretically amend the articles of association by means of verbal agreements so that resolutions could be passed unanimously in the future is not sufficient to invalidate this presumption and would go against the principle of legal certainty.

For M-GmbH, there was legal certainty during the period in question as the voting modalities at PD were known and M-GmbH was therefore able to assess whether a presumption of the existence of a close connection through financial relationships within the meaning of Article 11 (1) of the VAT Directive existed.

The German Government asserted that the fact that under German law the articles of association can be concluded or amended informally by partnerships leads to difficulties in proving the existence of a VAT group for the tax authorities. The CJEU held that the legal uncertainty cited by the German Government does not arise from the application of the VAT group regulation, but from the application of the formal requirements to which the establishment and amendment of the articles of association of partnerships are subject to under German law. Member States cannot invoke specific features of their national law in order to add a further condition to the conditions set out in Article 11 (1) of the VAT Directive unless this is a condition imposed to prevent abuse or evasion. Further, to exclude partners who are not financially integrated from VAT grouping is against the principle of fiscal neutrality on the basis that these entities are in competition with one another.


In summary, in light of the principles of legal certainty, proportionality and fiscal neutrality, Article 11 of the VAT Directive must be interpreted as precluding national rules which prohibit a partnership from VAT grouping on the basis that the partners, apart from the controlling company, are not exclusively persons financially integrated into the controlling company’s undertaking.

The German courts and the tax authorities must now implement this ruling and all German taxable persons should examine its impact and take appropriate action, if required. The German VAT group regime is not optional; if (new) criteria are met, a VAT group is formed. Taxpayers will therefore need to determine whether partnerships are part of a fiscal unity that they have previously managed as a sole proprietor.

Businesses which have been refused VAT grouping in other Member States where additional VAT grouping conditions have been introduced may also wish to review whether this judgment may allow them to form a VAT group.


For additional information with respect to this Alert, please contact the following:

Ernst & Young GmbH, Dusseldorf



  1. Council Directive 2006/112/EC.
  2. Finanzamt für Körperschaften Berlin.
  3. Larentia+Minerva GmbH & Co. KG (C-108/14).

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