On 12 December 2024, the Court of Justice of the European Union (CJEU) gave its judgment in case C-527/23 relating to interpretation of regulations governing the right to deduct VAT under Directive 2006/112/EC (VAT Directive) in the context of intercompany administrative services. CJEU’s judgment marks a clear limit on the tax authorities’ power to challenge taxpayers’ expenditures or right of deduction.
The case involved a Romanian company, member of a multinational group of companies, which purchased administrative services from other group members located outside Romania. A Romanian tax authority investigated the company and found that the services were received also by other group companies. The authority also concluded that the services were not necessary for the business of the Romanian company and denied it the right to deduct the related VAT.
In resolving the matter, CJEU held that tax authorities may not refuse the right of deduction on the basis of their assessment of the necessity or appropriateness of the purchase of such services, if the taxable person proves the existence of a link between the services and its taxable activities. Furthermore, VAT Directive must be interpreted as precluding national legislation which refuses the right to deduct input VAT charged on purchases of services demonstrably used for the purposes of taxable activities, even if the services were supplied also to other companies in the same group.
CJEU invoked several fundamental principles of the VAT system, emphasising their timeless application especially in the area of VAT deduction. This includes mainly the principle of fiscal neutrality which manifests itself precisely through the right of deduction. A taxable person is entitled to deduct VAT on purchased services, even if they concern a group of companies, provided that he proves that the services have been used for his taxable activities. At the same time, CJEU made a point of noting that it is for the taxable person to demonstrate the link between the services and his taxable activities. It is therefore crucial to hold appropriate documentary evidence confirming the existence of such a link. On the other hand, the right of deduction is unaffected by any subjective assessment made by the tax authorities in relation to the profitability of or need for the services on the part of the taxable person. Denying the right of deduction on the basis of any such assessment is contrary to VAT Directive.
Case C-527/23 is extremely important for Polish VAT payers who, when investigated by tax authorities, frequently have to grapple with them over the existence of a link between their expenditures and taxable activities. As in that case, Polish tax authorities seek to deny the right of deduction on the basis that, in their opinion, taxable persons fail to provide sufficient proof of such a link. While case C-527/23 does not do away with the need for preparing robust documentary evidence for such eventualities, it does offer strong arguments to contest the subjective approach of tax authorities.
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