Right to deduct VAT on the purchase of intra-group services – CJEU judgment

The judgment of the Court of Justice of the European Union (CJEU) of December 12, 2024, in case C-527/23 concerns the right to deduct VAT on services purchased within the same group of companies. The judgment highlights the limits of tax authorities’ interference in assessing the business purpose of expenses. It points out that the key criterion is the relevance of the services to taxable activities.

Dispute between the taxpayer and tax authorities

The case involved the Romanian company Weatherford Atlas Gip SA, part of an international oil services group. As a result of the acquisition of another group company, Foserco SA, Weatherford Atlas Gip inherited tax liabilities, including VAT settlements related to administrative services purchased from other Weatherford group entities based outside Romania.

VAT on these services was settled under the reverse charge mechanism, meaning that the company, as the purchaser, was responsible for charging and deducting the tax. However, during a tax audit, the Romanian tax authorities questioned the right to deduct VAT, claiming that:

• the purchased administrative services were neither necessary nor justified for its business activities,
• other group entities also benefited from these services, calling into question the justification for allocating the expenses solely to Weatherford Atlas Gip SA.

As a result, the Romanian tax authorities denied the taxpayer the right to deduct VAT, leading to a dispute that was brought before the CJEU.

Preliminary questions

The national court referred the following preliminary questions to the CJEU:

1. Must Article 168 of Council Directive 2006/112/EC of 28 November 2006 on the VAT Directive, read in the light of the principle of tax neutrality, be interpreted as precluding, in circumstances such as those of the main proceedings, the tax authorities from refusing a taxpayer the right to deduct VAT paid in respect of administrative services acquired, where it is established that all costs recorded for the services acquired have been included in the general costs of the taxpayer and that the taxpayer carries out only taxable transactions, the provision of services has been expressly confirmed by the tax authorities and the transactions have been carried out under the reverse charge mechanism (which excludes detriment to the state budget)?
2. When interpreting Articles 2 and 168 of the [VAT] Directive, in circumstances such as those in the main proceedings, can management and administrative services (i.e., assistance and advice in various areas as well as financial and legal advice) provided between companies within a group for the benefit of different members of the group be considered by each member as being used for taxable transactions, meaning acquired for his own use?
3. When interpreting Article 2 of the [VAT] Directive, if it is found that intra-group services were not provided for the benefit of one of the members of the group, may a company which is part of the group but is deemed not to have benefited from such services be regarded as a taxable person acting as such?

CJEU decision on the right to deduct VAT

The CJEU ruled that denying the right to deduct VAT in this case violates other fundamental principle of the common VAT system, which is tax neutrality. The guarantee of neutrality is the ability to deduct VAT incurred on expenses related to business activities, regardless of their purpose or achieved results. Therefore, if the entity claiming the deduction is an active VAT taxpayer and the purchased services are related to its taxable activities, neither the tax authorities nor the courts should assess the economic reasonableness of the transaction or restrict the right to deduct tax on this basis.

The fact that the purchased services were also used by the group of companies does not exclude the right to deduct VAT, provided that the taxpayer can precisely separate and justify the part of the expenses relating exclusively to his own needs. This issue will ultimately be decided by the national court.

The Court emphasized that tax authorities should assess the right to a deduction based on objective data regarding the taxpayer’s use of services, and not based on a subjective assessment of the expediency of those expenses.

CJEU judgment:

Article 168 of Council Directive 2006/112/EC of November 28, 2006, on the common system of value-added tax must be interpreted as precluding a national regulation or practice whereby the tax authority refuses the right to deduct VAT paid by a taxpayer on services acquired from other taxpayers belonging to the same corporate group because these services were simultaneously provided to other companies belonging to the same group and their acquisition was neither necessary nor justified, if it is proven that the services in question were used by that taxable person for his own taxable transactions.

Implications of the judgment for Polish taxpayers

The CJEU judgment may have consequences for Polish businesses and the practices of national tax authorities. In Poland, the tax authorities frequently question the right to deduct VAT, basing it on their subjective assessment of the necessity and economic expediency of incurred expenses. The CJEU judgment indicates that such an approach may contradict the principle of tax neutrality, which guarantees taxpayers the right to deduction if expenses are related to taxable activities, regardless of their business necessity.

The judgment may also affect the case law of Polish administrative courts, which will have to consider its interpretation when resolving tax disputes. This may lead to a reduction in arbitrary decisions by tax authorities and provide greater predictability in VAT settlements.
Taxpayers should remember, however, that although the judgment strengthens the protection of their rights, it does not relieve them from the obligation to be diligent in their record-keeping and to demonstrate the actual connection of acquired services with taxable activities. Therefore, proper preparation for potential audits and the application of transparent accounting rules within groups o companies are essential.

In practice, businesses should:

• keep detailed documentation confirming the actual use of purchased services for their own taxable transactions,
• apply transparent methods of cost allocation within the group to be able to show what proportion of expenses relate to a particular entity,
• be prepared for potential tax audits and the need to defend their position in administrative and judicial proceedings.

Summary

The CJEU judgment in case C-527/23 confirms that tax neutrality means the right to deduct VAT on expenses related to taxable activities, regardless of their purpose or necessity. This is an important ruling that could impact the practice of Polish tax authorities and strengthen the protection of entrepreneurs from excessive interference by the taxman.

In the face of dynamically changing regulations and the practices of tax authorities, it is crucial to properly prepare and secure the interests of the business. If you have questions regarding the right to deduct VAT within a group of companies or wish to consult your situation in terms of compliance with current regulations, our team of experts is at your disposal. We offer comprehensive tax advisory services, assistance in analyzing documentation, and support in proceedings before tax authorities.

If you have any further questions or require additional information, please contact your business relationship person or use the enquiry form on the HLB Poland website.

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