VAT grouping reforms

This article first appeared in Irish Tax Review, Vol. 39 No. 3. © Copyright of Irish Tax Institute.

“Not all those who wander are lost.” – J.R.R. Tolkien, The Fellowship of the Ring

The recently announced changes to the territorial scope of VAT groups in Ireland have altered the map that taxpayers and advisers have relied on for many years.

Like explorers entering unfamiliar territory, businesses with multi-country establishments must now reassess longstanding assumptions about where the boundaries of a VAT group begin and end.

As with any new landscape, the changes present both hazards and opportunities; the challenge is in understanding where they lie and plotting a safe path through.

In this article we outline what is changing, present the legislative and case law backdrop, set out some practical examples of the impact of the changes and provide an outline for what to do next.

With the transitional period for certain VAT groups in Ireland due to expire at the end of 2026, groups impacted by the changes should prepare their map and begin to set out on the journey.

David Duffy

Partner, Indirect Tax - VAT & Customs

KPMG in Ireland

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What is changing

On 19 November 2025 Revenue issued guidance (eBrief No. 216/25) reflecting a significant update to its interpretation of the territorial scope of Irish VAT groups. The change came into immediate effect for VAT groups formed on or after 19 November 2025.

For VAT groups in place before that date, a transitional period up to 31 December 2026 applies, with the new interpretation applying to such groups from 1 January 2027 onwards.

The change, in short, is that an Irish VAT group is interpreted as including only the Irish establishment of members of the group, with any foreign establishments of VAT group members no longer being part of the Irish VAT group.

As a result, any supplies between the Irish VAT group and foreign establishments of the VAT group’s members are no longer disregarded for Irish VAT purposes.

Furthermore, where an entity having an establishment in a VAT group in another EU Member State also has an Irish establishment (whether in an Irish VAT group or not), supplies between that other establishment and the Irish establishment are also no longer disregarded in Ireland under the new interpretation.

This change could therefore have a significant financial and operational impact for groups with supplies between establishments of the same entity (e.g. head office to branch, branch to head office, or branch to branch) where that entity is a member of a VAT group in Ireland or in another EU Member State.

This is particularly pertinent for businesses with no or partial VAT recovery on costs (e.g. financial services and insurance institutions), as VAT charges on those intra-entity supplies will likely result in additional VAT costs.

There may, however, also be some additional VAT recovery entitlement where taxable supplies are made by the Irish establishment to its foreign establishments.

Coincidentally, shortly after Revenue announced its change of interpretation regarding the territorial scope of VAT grouping in Ireland, HMRC announced a change to its interpretation of UK VAT groups.

As the UK is no longer bound by the jurisprudence of the Court of Justice of the European Union (CJEU), HMRC has taken the opposite view to that now applied in Ireland and most of the EU.

A UK VAT group is now deemed to include any overseas establishments of UK VAT group members, regardless of how the VAT group rules are applied in the overseas jurisdiction. This emphasises the importance of considering the overall position with potentially different approaches across jurisdictions.

Attracting these types of companies to Ireland is imperative to yield high growth and continue to put Ireland at the forefront of electronics R&D in Europe and worldwide.

Context and legal backdrop

The legislative basis for VAT grouping in the EU is Article 11 of EU VAT Directive 2006/112 (“the Directive”), which states that:

“After consulting the advisory committee on value added tax (hereafter, the ‘VAT Committee’), each Member State may regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links.

A Member State exercising the option provided for in the first paragraph, may adopt any measures needed to prevent tax evasion or avoidance through the use of this provision.”

Most EU Member States (including Ireland, and the UK before it exited the EU single market and customs union at the end of 2020) have adopted this provision and introduced VAT grouping into their domestic legislation (although the practical impact of VAT groups can vary between Member States). The relevant domestic provision in Ireland is s15 of the Value Added Tax Consolidation Act 2010.

For the purposes of this analysis, two aspects of Article 11 of the Directive are particularly important. The first is that members of the VAT group become a “single taxable person”.

Therefore, the entities within the VAT group essentially lose their individual character for VAT purposes, such that transactions between those members are disregarded for VAT purposes. This is subject to local exceptions (e.g. supplies of immovable goods within an Irish VAT group are not disregarded).

The second relevant part of Article 11 is the reference to “any persons established in the territory of that Member State”, which speaks to the territorial scope of VAT groups. The exact meaning of this phrase has been subject to debate for some time, with different approaches being adopted historically by different EU Member States.

On the one hand, “established in the territory of that Member State” could be interpreted as meaning that, although each member of the VAT group must be established in the Member State of VAT grouping, once that test is met, the entire legal entity (including its foreign establishments, if any) joins the VAT group. This is often referred to as the “wholeentity” approach to VAT grouping.

However, an alternative interpretation is that Article 11 limits the territorial scope of the VAT group to only the local establishment of the entity in that Member State, with any establishments of the entity outside of the Member State of the VAT group being excluded from its scope. This is referred to as the “establishment-only” approach to VAT grouping.

Case law developments

The question of whether “whole-entity” or “establishment-only” is the correct interpretation became the subject of case law before the CJEU, which ultimately favoured the “establishment-only” approach.

This was considered first in the case of Skandia America Corporation C‑7/13 (“Skandia”) in 2014 and later in the case of Danske Bank C‑812/19 in 2020. Both cases were referrals from Sweden. Although the judgments in the two cases arguably still left some room for interpretation, they both applied an “establishment-only” approach in deciding the questions referred to the CJEU.

Before discussing these two judgments in further detail, it is also important first to reference the FCE Bank C‑210/04 judgment, which pre-dated both. The CJEU held in that case that a branch that is not legally separate from its head office is, in the normal course, not a distinct taxable person for VAT purposes.

Consequently, services supplied between the head office and the branch (or vice versa) are not supplies for VAT purposes. The FCE Bank decision continues to apply where neither establishment is in a VAT group. However, it did not consider the potential impact of VAT grouping, and therefore further case law was required to analyse this topic.

Skandia

Skandia was the first such case to come before the CJEU. In that case a US-based corporation had a Swedish branch, which was a member of a VAT group in Sweden. Sweden adopted an establishment-only approach to VAT grouping.

The CJEU held that the services supplied from the US head office to the Swedish branch (although they were within the same legal entity and would ordinarily be disregarded under the FCE Bank principle) could no longer be disregarded because the Swedish branch was part of the Swedish VAT group.

Effectively, the inclusion of the Swedish branch in the Swedish VAT group severed the link between the US head office and the Swedish branch for VAT purposes, resulting in VAT applying to supplies for consideration from the US head office to the Swedish branch.

Danske Bank

The Danske Bank judgment in 2020 took this principle a step further. In that case a Danish bank had a branch in Sweden. The Danish head office was a member of a VAT group in Denmark, but the Swedish branch was not in a Swedish VAT group.

The question was whether the VAT group in Denmark impacted the VAT treatment in Sweden of services received by the Swedish branch. The CJEU held that the VAT group in the Denmark (which did not include the Swedish branch) also had the effect of breaking the link for VAT purposes between the Danish head office and the Swedish branch.

The judgment therefore took the establishment-only interpretation a step further by requiring consideration of whether a VAT group exists in both the EU Member State of supply and the EU Member State of receipt of the services.

Approach across jurisdictions

The Skandia and Danske Bank judgments brought more sharply into focus certain differences in interpretation of VAT grouping between EU Member States. Those countries that had already adopted an establishment-only approach to VAT grouping, reinforced by the CJEU judgments, continued in that vein.

Several countries, including Ireland, that had adopted a whole-entity approach did not immediately make changes but kept the matter under review.

Meanwhile, after the Skandia decision in 2015, the UK (then an EU Member State) adopted a hybrid approach, whereby it took account of the interpretation of the other EU Member State when considering the UK VAT treatment of supplies between a UK establishment in a VAT group and an establishment in another EU Member State.

The approach applied across jurisdictions has continued to evolve over time. For example, the Netherlands began adopting the establishment-only approach with effect from 1 January 2024. The Irish change referenced above follows this trend and brings Ireland’s interpretation of the territorial scope of VAT groups in line with most of its EU peers.

Conversely, the UK – no longer an EU Member State – has reverted to a whole-entity approach to its VAT grouping rules from November 2025 (ending the hybrid approach that it had adopted since 2015).

However, the UK continues to apply anti-avoidance rules (s43(2A) of the Value Added Tax Act 1994) to certain bought-in charges from a foreign head office or branch in a UK VAT group that are then passed on to other VAT members, which need to be carefully considered.

Practical examples

We set out below a number of practical examples to illustrate the principles outlined above. We then consider the steps that organisations should take in implementing (or, in the case of transitional VAT groups, preparing for the implementation of) these changes.

In this scenario the principle established in FCE Bank continues to apply: a charge from a foreign head office to its Irish branch (or vice versa) where neither is a member of a VAT group continues to be disregarded for Irish VAT purposes.

Therefore, it may be preferable in some cases to exclude or remove an establishment from a VAT group to help avoid the impact of VAT on cross-border intra-entity charges.

However, the quid pro quo of being outside a VAT group is that charges between local entities/establishments in the same jurisdiction would ordinarily be subject to VAT in the absence of a VAT group (unless VAT exempt in nature), so a cost–benefit assessment is required.

Historically, the charges to and by the Irish branch and its foreign head office were disregarded for VAT purposes irrespective of the Irish VAT group.

However, after the change of interpretation (and, in the case of VAT groups in effect before 19 November 2026, after the end of the transitional period), only the Irish branch is considered to be a member of the Irish VAT group.

Accordingly, supplies between the foreign head office and its Irish branch will no longer be disregarded for Irish VAT purposes in this scenario. To the extent that these charges are in consideration for taxable (and not exempt) supplies of services, Irish VAT would arise on a reverse-charge basis for the Irish VAT group on receipt of the services from the foreign head office.

Similarly, supplies by the Irish branch to the foreign head office would typically have a place of supply outside of Ireland but may contribute to VAT recovery for the Irish branch where those supplies are taxable in nature.

The change of interpretation in Ireland will also impact scenarios where an entity that is a member of a VAT group in another EU Member State also has an Irish establishment (regardless of whether the Irish establishment is in an Irish VAT group or not).

This follows the principles established in the Danske Bank judgment. As above, the Irish branch may have to selfaccount for Irish VAT on supplies received from the EU head office in this scenario and may be considered to make supplies to the EU head office, which would be taken into account in its VAT recovery position.

The change in interpretation of VAT grouping in both Ireland and the UK requires detailed consideration on a case-by-case basis.

Where neither the Irish nor the UK establishment of the same entity are in a VAT group in either jurisdiction, there should be no supply for VAT purposes between those establishments under the FCE Bank principle.

Where an entity with an establishment in an Irish VAT group also has a UK establishment, any supplies between the Irish and UK establishments should no longer be disregarded from an Irish VAT perspective. However, the UK establishment could still potentially disregard these supplies, given the different interpretation in the UK.

Where the UK establishment is also a member of a UK VAT group, this requires consideration of the UK anti-avoidance rules, which could, nonetheless, deem there to be a supply in the UK, depending on the nature of the services.

As will be seen from the above, the interaction of the VAT grouping rules between Ireland and the UK is complex and should be carefully considered, particularly where there are supplies in both directions.

Navigating the changes

All businesses that have both Irish and foreign establishments of the same legal entity should consider the extent to which they are impacted by these changes. They should ensure they are clear on where establishments exist and whether each establishment is a member of a VAT group. They should then identify and map out the transaction flows between those establishments.

Where such transactions are identified, the VAT treatment of the transactions should be considered. Although the default position is that any supply for consideration will be a taxable supply, there may be grounds for VAT-exempt or “outside the scope of VAT” treatments in certain circumstances (however note that the conditions for VAT exemption are interpreted strictly).

Where taxable supplies are identified, systems and procedural updates may be required to address these and to ensure that VAT is appropriately captured.

This is particularly relevant to businesses with no or partial VAT recovery (as any VAT arising will likely trigger a net VAT payable amount to Revenue), but businesses with full VAT recovery should, nonetheless, ensure that their systems are capable of capturing the appropriate VAT payable and deductible entries in their VAT returns.

Taxable supplies made by the Irish establishment to a foreign establishment may also give an entitlement to VAT recovery on related costs in Ireland. This may be factored into the Irish establishment’s partial VAT exemption methodology, taking account of the general principles that any such methodology must correctly reflect how costs are consumed and have due regard to the range of the entities’ activities.

Where intra-EU taxable supplies take place between establishments, they will also typically be subject to normal VAT invoicing and VIES reporting requirements. VAT invoices (with appropriate VAT identification numbers and reverse-charge wording) should be issued for cross-border supplies and VIES reporting should be completed.

Although not an immediate change, the impact of the VAT in the Digital Age (ViDA) changes due to come into effect across the EU in July 2030 should also be considered. These changes will require electronic invoices to be issued within a short timeframe (typically, ten days) for cross-border intra-EU supplies and continuous digital transaction-level reporting (typically, five days later), which will replace periodic VIES reporting.

Conclusion

The new VAT group rules create a complex landscape where friends or foes can lurk around the bend.

However, as Tolkien observed: “not all those who wander are lost”. Those who take the time now to understand the new framework, chart the risks and identify the opportunities should find themselves well placed as the terrain changes in the coming months.

Get in touch

The VAT grouping landscape in Ireland will change significantly on 1 January 2027, when the transitional period for pre-November 2025 VAT groups comes to an end.

For some businesses, this may result in additional VAT costs on cross-border charges within the same legal entity, such as between a head office and branch, where either establishment is a member of a VAT group in Ireland or another EU Member State. Financial services businesses are likely to be particularly affected.

In an article recently published in the Irish Tax Review, David Duffy and Eva Baker from our Indirect Tax team examine the background to these changes, consider practical examples, and outline the steps businesses should take ahead of the deadline.

If your organisation may be impacted, we would be very happy to discuss further with you. For more information, please contact Glenn Reynolds, David Duffy, Eva Baker or your usual KPMG contact.