This article will answer the following questions:

• Does the purchase of administrative services have to be “necessary” or “reasonable” in order to deduct VAT from them?
• How important is the appropriate way of documenting transactions and their connection with business activity in the event of a dispute over the right to deduct VAT?

On 12 December 2024, the Court of Justice of the European Union (CJEU) issued an important judgment in a case concerning the right to deduct VAT by taxpayers purchasing services from related entities (reference number C 527/23). This judgment is particularly important for companies that use services provided by other entities within the same capital group.

Purchase of services from related entities by companies within a group

The case, which ended with the CJEU issuing a judgment favorable to taxpayers, concerned the Romanian company Weatherford Atlas Gip, part of the Weatherford group of companies specialising in oil services. Weatherford Atlas Gip took over the (also Romanian) company Foserco SA, which provided support services for oil and gas extraction.

In 2015-2016 Foserco provided drilling services to OMV Petrom and Petrofarc. In order to provide these services Foserco acquired general administrative services from Weatherford Group companies, in particular IT, HR, marketing, accounting and consulting services.

The services in question were provided by Weatherford Group entities based outside Romania. The VAT reverse charge mechanism was applied to these services.

Importantly, other Weatherford group companies also used the same administrative services.

Tax dispute over the right to deduct VAT and the decision of the Romanian tax authority

In 2019, the Romanian tax authority initiated a tax audit, as a result of which it denied the right to deduct VAT paid by Foserco for administrative services purchased from Weatherford group companies. 

According to the Romanian tax authority, the taxpayer had no right to deduct VAT because they had not provided a document confirming the connection between the services purchased and the business activity conducted. The documents that the taxpayer submitted did not indicate the nature of the services, the persons who provided the services, or the period in which the services in question were provided. Moreover, according to the tax authority, the documents did not indicate whether the services purchased were necessary for the company.

The case was brought to the Romanian District Court, which questioned whether the right to deduct VAT could be denied based on the tax authority's subjective assessment of the necessity and justification of the purchase of such services, adopted in this case by the tax office even though the costs of services provided to Foserco were properly included in the general operating costs of this taxpayer.

What does the judgment of the Court of Justice of the European Union mean for taxpayers?

The Court of Justice of the European Union once again sided with taxpayers and disagreed with the subjective denial of the right to deduct VAT by tax authorities.

The EU court emphasised that both factors taken into account by the tax authorities during the inspection – i.e. the fact that administrative services are provided simultaneously to multiple beneficiaries and the uncertainty as to whether the acquisition of administrative services was necessary or appropriate – seem to be irrelevant to the right to deduct VAT.

The VAT Directive does not make the exercise of the right to deduct dependent on the criterion of economic profitability of the transaction giving rise to the tax charge.

The CJEU judgment is therefore an important decision for taxpayers who operate within capital groups and purchase services from related entities. Although it was issued in a Romanian case, it is binding on all EU Member States, including Polish tax authorities.

The CJEU ruling confirms for taxpayers that the right to deduct VAT is not dependent on whether the services are provided to only one or many entities in a group. The most important fact remains that the services were actually provided and used (even indirectly) for the business of the entity purchasing them.

If administrative services provided by entities in a group are used for business purposes, tax authorities should not deny entrepreneurs the right to deduct VAT.

In the context of the case discussed above, one more important conclusion can be drawn – the documentation of transactions with related entities and their connection with the taxpayer’s business activity is of key importance for the deduction of VAT on administrative services. If the Romanian taxpayer had documentation confirming the evidence questioned by the tax authority, the case would probably not have reached the CJEU, but rather would have ended at the tax audit stage (and with a positive decision for Foserco).

The experience of RSM Poland experts shows that tax authorities quite often question the method of settling services provided between related entities. In order to avoid disputes, the most important thing is to properly document transactions, which will confirm the right to deduct VAT. It is therefore worth using professional tax advisory services at the early stages of the transaction.