CJEU and the right to deduct VAT within a group of companies

Does a taxpayer retain the right to deduct when input VAT results from services provided by one of the group companies to both the taxpayer seeking to deduct and the other group members? This issue has been resolved by the CJEU in its judgment of December 12^th, 2024, ref. C-527/23.

Facts

The case concerned the Romanian company Weatherford Atlas Gip SA – a member of an international group specialising in petroleum services. This company had taken over the Romanian Foserco SA, which had previously purchased general administrative services from other Weatherford group entities based outside Romania as part of its operations. VAT on these services was settled with the reverse charge mechanism.

As a result of a tax audit, the Romanian authorities refused to allow Weatherford Atlas Gip SA to deduct input VAT on the acquired administrative services, arguing that it had not demonstrated a connection between the acquired services and the company’s taxable activities. Moreover, according to the Romanian authorities, the acquisition of such general services was neither necessary nor reasonable in the context of its activities. Thus, the taxpayer was denied the right to deduct VAT.

CJEU ruling

The CJEU held that the denial of the right to deduct VAT in this situation violated the fundamental principle of the common VAT system, which is tax neutrality. Neutrality is guaranteed by the right to deduct input VAT charged on expenses related to the business activities, regardless of their purpose or result. Therefore, since the deducting entity is a VAT taxpayer and the services purchased by it are related to its taxable activities, it is not the role of the tax authority or the court to assess the profitability and meaningfulness of the transaction and decide on the recognition of the right to deduct on this basis.

An argument against the right to deduct is not the fact that the acquired administrative services benefited the entire group of companies (which was not a VAT group), as long as the taxpayer is able to establish and justify that part of the expenses that was incurred for its own needs, not third party needs. This circumstance remains to be examined by the national court.

The CJEU clearly emphasized that the tax authorities’ decisions should be based on an objective analysis of the documentation and the actual use of the services by the taxpayer, and not on a subjective assessment of the legitimacy of the expenses.

Significance of the judgment

The judgment in question is an important voice in the understanding of the principle of neutrality and the limits of the tax authorities’ right when analysing the deduction of VAT. It happens that also Polish authorities try to deny taxpayers the right to deduct based on their assessment of the business rationality of the transactions carried out. Meanwhile, tax regulations do not allow the right to deduct to be made dependent on such subjective assessments. This right may be denied when a given purchase transaction is fraudulent or abusive, or when no clear connection between the purchases made and the taxpayer’s taxable activities has been demonstrated.

However, it should be emphasised that the CJEU judgment does not release taxpayers from the obligation to reliably document the purchased services and demonstrate their connection with the company’s taxable activities. Hopefully, however, the approach of the authorities and the jurisprudence of the courts will take into account the CJEU’s interpretation presented in the judgment under discussion.

It should be noted that this concerns the activities of a specific company and not a group of companies as a whole. The situation of each VAT taxpayer is analyzed individually and the burden of proof in this respect rests with the taxpayer. Therefore, reliable documentation of transactions within capital groups is all the more important.