EU VAT ruling clarifying VAT Exemption for Cost-Sharing Groups

February 27, 2026 EU VAT Update

A recent VAT-related rulings was delivered by the European Court of Justice at the end of January 2026 providing guidance on the application of the VAT exemption for cost-sharing groups, addresses longstanding uncertainty in the EU VAT practice about when shared services provided within groups of exempt entities can themselves qualify for the exemption.

Background of the Case

The case originated from preliminary questions referred by the Spanish Tax Authority in relation to two Spanish groupings which had established shared infrastructures to organise cleaning services for their members’ facilities in the healthcare and education sectors.

Each group entered into contracts with third-party providers to carry out cleaning, staff management, and related tasks, passing costs on to members. The Spanish tax authorities denied the to a VAT exemption claimed by the groups, on the basis that the services provided were not “directly and exclusively” used in the members’ exempt activities, a stricter standard under the Spanish VAT law compared to EU VAT requirement.

Legal issue and interpretation of the VAT Law

 Based on the EU VAT legislation, supply of services by independent groups of persons to their members can be VAT exempt where such persons are non-profit bodies and the services are directly necessary for the exercise of the members’ exempt main activities.

Member States had adopted different formulations in their national law, with the Spanish legislation requiring that services be not only directly necessary but also exclusively used for exempt activities.

Via the ruling, the Court addressed whether National restrictions could be reconciled with the EU VAT Law, stating that

  • The exemption’s requirement of “services directly necessary for the exercise” of an exempt activity does not mean that the services must be indispensable to a specific transaction. It is enough that they are sufficiently connected to enable or facilitate the exempt activity.
  • General services, including those of a support nature such as cleaning can qualify as directly necessary, in cases where they are needed in practice to carry out the exempt activities of group members.
  • The Court further stressed that concerns about distortions of competition should not automatically justify excluding such services from the exemption.

 Impact of the VAT ruling

The ruling as issued by the Court of Justice provides clarity to:

  • Member States on what constitutes direct necessity in the context of where group services are provided, constrains Member States from adopting overly narrow interpretations that would undermine the directive’s intent;
  • Cost-sharing entities supplying administrative, support, or auxiliary services in sectors such as healthcare or education which can more confidently structure arrangements to benefit from VAT exemption under EU law, provided those services are directly connected to the members’ exempt activities and are functionally essential to same.
Archives