CJEU Rules on the Right to Deduct VAT for Group Services

The Court of Justice of the European Union (CJEU) has provided important clarification on the VAT treatment of services exchanged between entities within the same corporate group, where the companies do not constitute a VAT group. The judgment reinforces that expenses incurred should be deductible as long as they are used for the taxable person's own activities, regardless of whether those services are shared among other group entities.

The case centered on whether a company within a corporate group can be denied the right to deduct VAT on administrative services provided by other companies within the same group. The Court delivered its judgment on December 12, 2024, in Case C-527/23 involving Weatherford Atlas Gip SA and the Agenția Națională de Administrare Fiscală (Romania’s National Agency for Tax Administration).

Understanding the Facts in Case C-527/23

The case involved a Romanian company, part of the international Weatherford Group. The company provided drilling services in Romania and, to support those operations, purchased various administrative services (such as accounting, IT, human resources, and consulting) from other entities within the same group, which were located outside of Romania. The VAT on these services was reported in Romania under the reverse charge mechanism.

However, during a tax audit, Romanian tax authorities denied the company’s right to deduct VAT on these services based on two main arguments: insufficient evidence of the direct link between the services and the company’s taxable economic activities, and that the services were provided simultaneously to several companies within the group.

Conclusions of the Court in Case C-527/23

The CJEU reaffirmed that the right to deduct VAT paid on the acquisition of goods or services is a fundamental principle of the EU’s VAT system. This right is designed to ensure that VAT remains neutral for businesses engaging in taxable transactions. For the deduction right to be valid:

• The services must be used directly for the taxable person’s own taxable output transactions.
• There must be a direct and immediate link between the acquired services and the company’s taxable business activities.
• Even if the services are not tied to specific taxable transactions, the VAT can still be deducted if the services form part of the company’s general overhead costs contributing to its overall taxable activities.

In this regard, the Court indicated that the tax authorities cannot deny VAT deductions based on whether the services appear economically necessary or profitable. Business decisions regarding the necessity of services fall outside the scope of VAT considerations, and deductions cannot be refused merely because the intended outcome was not achieved, or the services seemed inappropriate from a tax authority’s subjective viewpoint.

Also, it is established that the taxpayer is responsible for providing sufficient proof and documentation (contracts, invoices, and supporting evidence) to demonstrate that the acquired services are used for their taxable activities.

As a consequence, the Court refuses the arguments of the Romanian Tax Authorities to reject the VAT deduction:

• Shared services among group entities do not invalidate VAT deductions: The CJEU held that the fact that services were provided simultaneously to other entities within the group does not undermine the right of each recipient company to deduct VAT. Each company can deduct the portion of costs that corresponds to the services used for its own taxable operations, as long as that proportional share can be justified.
• Subjective assessment of service necessity is not permitted: The tax authorities cannot deny deductions based on subjective judgments regarding the necessity or appropriateness of the services. Even if the economic benefit of the service cannot be demonstrated, as long as the services were intended to support taxable transactions, the right to deduct VAT remains valid.

The CJEU concluded that Article 168 of the VAT Directive prohibits tax authorities from denying VAT deductions on services provided within the same corporate group unless it is clearly established that the services were not used for the taxable activities of the specific company seeking the deduction.

This ruling reaffirms the principle of VAT neutrality and prevents tax authorities from using subjective assessments to deny legitimate VAT deductions, especially in cases involving intra-group transactions where services are shared among multiple subsidiaries.