European Court of Justice Decision Sheds Light on VAT Deduction in Common Intragroup Transactions

Background:

Weatherford, a group specializing in oil services, includes Weatherford Atlas Gip, which merged with Foserco SA ("Foserco"  - now Weatherford Atlas Gip), a Romanian company, in 2016. Foserco provides auxiliary services for oil and natural gas extraction.

Foserco offered drilling services to two other Romanian group entities and acquired various administrative services (e.g. IT, HR, marketing, finance) from other Weatherford group companies. The "reverse charge" mechanism was applied. To reflect economic reality, a portion of the cost was allocated to Foserco (one of the group entities using these services), which deducted VAT on these purchases.

In principle, for VAT to be deductible, a taxable person must demonstrate a direct and immediate economic link between the deductible purchase and its economic activity. In the case at hand, the Romanian tax authorities refused this deduction for two reasons:

• The administrative services allegedly had no link with Foserco's drilling activities, as Foserco was not the sole beneficiary within the group;
• The services were not necessary or appropriate.

Romanian courts referred questions to the ECJ to confirm whether the provision of administrative services to other group companies and/or their perceived necessity or appropriateness precludes the right to deduct input VAT.

Reasoning of the Court:

The ECJ emphasized that the right to VAT deduction is a fundamental aspect of the VAT common system, directly tied to its principle of neutrality. The right to deduct VAT applies if a direct and immediate link exists between a particular input transaction and an output transaction. However, a taxable person also has a right to deduct even in the absence of such link if the costs of services in question are part of its general costs, as these are deemed to have a direct and immediate link with the taxable person's economic activity as a whole.

No deduction right can however arise when incurred costs are linked to transactions carried out by a third party. The scope of a taxable person’s right to deduct must be assessed in the light of underlying contracts as well as economic and commercial reality.

The fact that administrative services are provided simultaneously to several recipients seems irrelevant for this assessment. As long as the proportion of the costs borne by a taxable person corresponds to the services received for its own taxed output transaction, these costs remain deductible. Additionally, the necessity or appropriateness of the services also seems irrelevant, as the VAT Directive does not subject the right to deduct to any economic profitability criterion.

Key takeaway:

In its judgement, the ECJ adopts a pragmatic but consistent interpretation of the applicable VAT principles. The Court confirms that the fundamental principles of the VAT system apply to intragroup transactions. This decision is likely to bring relief to many taxpayers, as the use of centralized administrative services is common in multinational groups. Provided that the economic reality is met, there is no reason to prevent the VAT deduction of such costs.  

Other interesting cases related to transfer pricing policies and VAT are likely to follow as the ECJ has been asked various questions in this regard (Arcomet Towercranes, Hogküllen, Stellantis Portugal).

In case of questions, please do not hesitate to reach out to your regular contact within the Fieldfisher Belgium tax team.