C‑527/23. – Weatherford Atlas Gip SA

Provided that the services were utilised for the taxable person’s business purposes, the input VAT deduction may not be refused solely on the ground that the purchase of services was not reasonable. 

The plaintiff in the background case specialises in the oil industry. In 2016, the plaintiff took over, through a merger by acquisition, Foserco SA, a Romanian company, which provided drilling services to two oil companies, i.e., OMV Petrom and Petrofarc. In 2015 and 2016, Foserco SA purchased IT, HR, marketing, accounting and consultancy services from foreign companies of the Weatherford group and accounted for Romanian VAT on the cost of services by reference to the international reverse charge with the immediate deduction of the input VAT. 

The Romanian tax authority did not deny the reality of the services nor did allege any tax evasion, however refused the VAT-deduction on the ground that the provision of that services to the plaintiff (as a successor of Foserco SA) were unnecessary. The plaintiff lodged an administrative act against the tax authority’s decision. The Regional Court of Prahova, which is the referring court, initiated the preliminary ruling with the ECJ. In its judgement, the ECJ has confirmed that the right to VAT-deduction is a fundamental principle of the common system of VAT and may not, in principle, be limited. 

By reference to its former judgements, the ECJ stressed that the taxable person may deduct the input VAT on the cost of services if the purchase of services has direct and immediate link with the taxable output transactions or, in the absence of such a link, the cost of services make up price components of the taxable supplies, as general operational cost. This link should be assessed in the light of the objective content of the transactions, and it has no relevance whether the purchase of the services was economically reasonable. Therefore, as long as it is established that the services were actually supplied and used by the taxable person for the purposes of its own taxable business activity, the input VAT-deduction may not be challenged on the ground that the purchase of services was not necessary or appropriate.

Remember that this judgement concerns only the input VAT-deduction so related parties should be mindful of the potential transfer pricing consequences. If an independent party would find the services in question as unnecessary and would not be willing to purchase them, there is a risk that the tax authority will not allow the deduction of the costs of services for Hungarian corporate income tax purposes.

Full English text of the judgement