On December 12, 2024, the Court of Justice of the EU (CJEU) passed judgment in a case concerning the VAT deduction of the purchase of intercompany, cross-border administrative services by a Romanian entity.
Background
Weatherford Atlas Gip (hereinafter ‘WAG’) is a company based in Romania that provides oil drilling services and belongs to the Weatherford group. In the context of its economic activities, it purchased administrative services (including IT, marketing, accounting and HR services) from other group companies that were based outside of Romania. The Romanian tax authorities took the position that the costs of these services constituted the so-called shareholder costs and denied deduction of the reverse charged VAT on account of the argument that the services were not linked to the taxed output transactions of WAG. The purchase was deemed to be inappropriate and unnecessary for the economic activity of WAG. WAG challenged their decision.
Decision
The CJEU rules that the right to deduct input VAT is dependent on the existence of a direct and immediate link between the costs and the taxed output transactions (or the economic activity as a whole) of the taxable person. It is not relevant whether the services are provided simultaneously to several recipient group companies. Deduction of input VAT does not depend on the economic profitability of the purchases, following which it is irrelevant whether the goods or services are necessary or appropriate.
The outcome is that in this case, the Romanian tax authorities are not allowed to deny deduction, as long as the legal criteria of the VAT Directive have been met.
Consequences for the practice
This judgement appears to show an overlap between VAT and direct taxes. However, opposed to the position of Romanian tax authorities, due to its firm basis in EU law and taking into account VAT neutrality, VAT is treated as a standalone tax that is independent of other (direct) tax law systems. Therefore, in principle, the non-deductibility for corporate tax purposes should not be the leading argument when looking at input VAT deduction.
The European Court underlines that VAT deduction is to be judged based on the legal criteria of the VAT Directive. The tax authorities should not deny VAT deduction if they deem certain purchases to be inappropriate or unnecessary, as deduction would otherwise become dependent on subjective rather than objective criteria, which would not be neutral and consistent.
In some cases, transfer pricing corrections should be assessed from a different perspective. The Weatherford Atlas case does not mention excluding TP adjustments from influencing the VAT treatment of transactions. It is important to note that VAT implications should be assessed on a standalone basis and a clear distinction must be made between different types of transfer pricing corrections and their possible effect on the VAT position.
Conclusion
In practice, the tax authorities regularly question the parent company’s input VAT deduction. The subsidiaries are less often the objective of such measures. However, the judgement shows that certain aspects must be taken into account when invoicing supplies of a holding company to other group companies in order not to jeopardise the input VAT deduction.
Although the verdict in the Weatherford Atlas case appears clear, there are several more cases on the interplay of TP and VAT currently pending, whose outcome remains to be seen. It cannot be excluded that the CJEU will at some point create certain (inter)dependencies between concepts or rules in TP, direct taxes and VAT.
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Please keep in mind that legislation is subject to frequent change. This newsletter is therefore necessarily based on our understanding and correct interpretation of the law and practice at the time of publication of this newsletter. This newsletter will not be updated due to changes in legislation that occur after the issuance of this letter.