On December 12, 2024, the ECJ issued its decision C-527/23 (Weatherford Atlas Gip).
Subject: This Briefing Document analyses the judgment of the European Court of Justice (ECJ) in Case C-527/23 concerning the deductibility of Value Added Tax (VAT) on administrative services purchased within the same group of companies.
Sources:
- “CURIA – Documents” – Judgment of the Court (Sixth Chamber) of 12 December 2024 in Case C-527/23 (Provisional text).
- “ECJ C-527/23 (Weatherford Atlas Gip) – Judgment – Refusal of the right to deduct if services are not used for taxable transactions – VATupdate”.
1. Introduction and Background:
This briefing document analyses the ECJ’s judgment in Case C-527/23, Weatherford Atlas Gip SA v Agenţia Naţională de Administrare Fiscală, which concerns the interpretation of Article 168 of Council Directive 2006/112/EC (the VAT Directive) regarding the right to deduct input VAT. The case originated from a request for a preliminary ruling by the Tribunalul Prahova (Regional Court, Prahova, Romania) regarding the Romanian tax authority’s refusal to allow Weatherford Atlas Gip SA (WAG), part of the Weatherford group specialising in oil services, to deduct VAT paid on administrative services purchased from other companies within the same group.
The dispute arose following a tax inspection of WAG (which had taken over Foserco SA) for the period 2014-2015. The tax authority refused VAT deduction on administrative services (IT, HR, marketing, accounting, consultancy) purchased by Foserco from other Weatherford group entities established outside Romania (under the reverse charge procedure). The reasons for refusal were a perceived lack of demonstrated link between the purchased services and Foserco’s taxable activity, insufficient evidence of the nature, provider, period, and necessity of the services, and the fact that these services were also provided to other group companies, implying they were not solely for Foserco’s benefit and were not specifically required by them.
The referring court sought clarification on whether this refusal, based on a subjective assessment of necessity and appropriateness, was compatible with the VAT Directive, particularly when the costs of these services were included in WAG’s general costs and WAG only carried out taxable transactions.
2. Key Legal Provisions:
The judgment primarily focuses on the interpretation of Article 168 of the VAT Directive, which states:
“In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person…”
Other relevant articles mentioned include:
- Article 2(1)(c): Defines the supply of services for consideration as subject to VAT.
- Article 9(1): Defines a ‘taxable person’.
- Article 11: Allows Member States to treat closely linked, legally independent persons as a single taxable person (VAT group), although the ECJ noted this was not applicable in this case as the services were provided by entities outside Romania.
3. Main Themes and Important Ideas:
The ECJ’s judgment strongly reaffirms core principles of the VAT system and clarifies their application to intra-group service transactions.
3.1. Fundamental Principle of VAT Deduction:
The Court reiterated the fundamental nature of the right to deduct input VAT, stating it is “an integral part of the VAT scheme and may not, in principle, be limited” (CURIA – Documents, paragraph 21). This right is intended to relieve taxable persons entirely of the burden of VAT paid in the course of their taxable economic activities.
3.2. Link to Taxed Transactions:
The judgment underscores that the right to deduct input VAT is conditional upon the purchased goods and services being “used for the purposes of the taxed transactions” (CURIA – Documents, paragraph 22) of the taxable person.
3.3. Direct and Immediate Link and General Costs:
The ECJ clarified the required link. While a direct and immediate link between a specific input and a specific output transaction giving rise to the right to deduct is generally needed, the right to deduct also exists when such a direct link is absent, provided the costs of the input goods or services form part of the taxable person’s general costs and are components of the price of their taxable supplies. Such general costs have a “direct and immediate link with the taxable person’s economic activity as a whole” (CURIA – Documents, paragraph 29), referencing the Investrand case (C-435/05).
3.4. Objective Use and Benefit:
The Court emphasised that the existence of the necessary link must be assessed based on the “objective content” (CURIA – Documents, paragraph 30) of the transactions, considering all surrounding circumstances. The “actual use” of the goods and services by the taxable person and the “exclusive reason for that purchase” are critical in determining this objective content.
3.5. Shared Services within a Group:
The ECJ explicitly stated that the fact that administrative services are provided “simultaneously to several recipients” (CURIA – Documents, paragraph 34) within a group does not, in itself, preclude the right to deduct. The crucial factor is whether the “proportion of the costs relating to those services, borne by the taxable person, actually corresponds to the services which it received for the purposes of its own taxed output transactions” (CURIA – Documents, paragraph 34).
3.6. Irrelevance of Necessity and Appropriateness:
A key aspect of the judgment is the clear statement that the “question whether the purchase of the administrative services at issue… was necessary or appropriate also seems irrelevant” (CURIA – Documents, paragraph 35). The VAT Directive does not make the right to deduct subject to a test of economic profitability or necessity of the input transaction. The principle of fiscal neutrality ensures that all economic activities subject to VAT are taxed neutrally, irrespective of their purpose or results.
3.7. Burden of Proof:
The ECJ reaffirmed that the “burden of proof” (CURIA – Documents, paragraph 36) for establishing eligibility for VAT deduction lies with the taxable person seeking the deduction. Tax authorities are entitled to request the evidence they deem necessary to determine whether the deduction should be granted. This evidence could include service agreements, cost allocation methodologies, and proof of actual use and benefit. However, the assessment of this evidence is the responsibility of the national court.
3.8. Preclusion of Refusal Based on Shared Benefit or Lack of Necessity:
The central ruling of the Court is that Article 168 of the VAT Directive precludes national legislation or practices that allow tax authorities to refuse VAT deduction on intra-group services based solely on the grounds that the services were provided to other group companies simultaneously or were deemed unnecessary or inappropriate, provided it is established that those services are used by the taxable person for the purposes of its own taxed output transactions.
“Article 168 of Council Directive 2006/112/EC… must be interpreted as precluding national legislation or a national practice under which the tax authority refuses the right to deduct input value added tax paid by a taxable person when acquiring services from other taxable persons belonging to the same group of companies on the grounds that those services were supplied at the same time to other companies in that group and that their purchase was not necessary or appropriate, where it is established that those services are used by that taxable person for the purposes of its own taxed output transactions.” (CURIA – Documents, paragraph 38)
3.9. Inadmissibility of the Third Question:
The ECJ deemed the third question referred by the Romanian court (concerning the taxable person status of a company not benefiting from intra-group services) inadmissible as it was considered irrelevant to the core issue of VAT deduction in the main proceedings, where Foserco’s status as a taxable person was not contested.
4. Implications of the Judgment:
This judgment has significant implications for businesses operating within multinational groups and for how tax authorities assess VAT deductibility on intra-group services:
- Focus Shift: The focus shifts from the tax authority’s subjective assessment of necessity to the objective use of the services by the taxable person for its own taxed transactions.
- Shared Services Deductibility: It clarifies that VAT deduction on shared intra-group services is not automatically denied. Businesses need to demonstrate that the costs allocated to them relate to services used for their own taxable activities. Clear documentation and cost allocation methodologies will be crucial.
- Limits on Tax Authority Discretion: Tax authorities cannot rely solely on arguments of non-necessity or shared benefit to deny VAT deduction if the taxable person can demonstrate the requisite link to their taxable outputs.
- Burden of Proof Remains: Businesses still bear the responsibility of providing sufficient evidence to support their VAT deduction claims.
- National Court Assessment: National courts will play a crucial role in assessing the evidence presented by taxpayers based on national rules of evidence.
5. Conclusion:
The ECJ’s judgment in Weatherford Atlas Gip provides important clarification regarding the deductibility of VAT on intra-group administrative services. It reinforces the fundamental principles of the VAT system, particularly the crucial link between input services and a taxable person’s own taxed output transactions. The judgment restricts the ability of national tax authorities to deny deductions based on subjective assessments of necessity or the fact that services benefit multiple group entities. Businesses operating within international groups should ensure they have robust documentation and clear methodologies for allocating the costs of shared services to demonstrate the extent to which these services are used for their own taxable transactions, thereby supporting their VAT deduction claims.
