CJEU judgment on VAT and intra-group management services

What does this mean for your organisation?

To prevent tax evasion or avoidance Member States are allowed to apply an open market value to - for example - inter-company transactions, where either one of the parties to the inter-company transaction has no full right of VAT recovery. The open market value is the price of 'comparable services'. If there are no 'comparable services', it is the 'full cost' of the inter-company service. The central issue in the Högkullen case is whether the inter-company services are to be seen as one unique single supply of services, in which case the open market value cannot be the price of 'comparable services'. If then the open market value amounts to the 'full cost', the question were to arise what the elements of the 'full cost' are. The CJEU however, argued that the pricing structure is not decisive to this end and does not consider the inter-company services as one single, unique supply. Consequently, the CJEU rules that for each separate service, which had been purchased from third party suppliers, a comparable service can be identified, so that the open market value is the (purchase) price of those services.

As opposed to Sweden, the Netherlands has not implemented Article 80 of the VAT Directive in full (only for certain categories of supplies). This judgment therefore does not seem to have a direct impact on Dutch VAT. However, this may be different for businesses with entities and activities extending into the wider EU market. It is important for businesses to revisit their intercompany services and assess whether the pricing structure of intra-group supplies may be prone to corrections of the VAT taxable base in EU member states where such 'open market value' rules are implemented. This may also have an impact on VAT recovery, compliance and reporting.

This judgment is the latest in a series of CJEU referrals that highlight the importance of intercompany service agreements and the intersection between VAT and Transfer Pricing. Two other relevant cases in this regard are still pending before the CJEU: Arcomet Towercranes (C‑726/23) and Stellantis Portugal (C-603/24). We will keep you updated on any developments.

Background

The case involves Aktiebolaget Högkullen ('Högkullen'), the parent company of a real estate management group. Högkullen's sole activity is managing all its subsidiaries for consideration. These services include management, financial, real estate management, investment, information technology and personnel management services.

The consideration is determined using a cost-plus method, covering expenses such as premises, telephone, information technology, corporate hospitality, and travel. Costs related to shareholders or capital-raising activities were excluded from these calculations. The actual real estate management is carried out by its subsidiaries, which are not fully entitled to VAT recovery because their activities are partly VAT-exempt. In the relevant year, Högkullen made costs and recovered the VAT in full.

The Swedish tax authorities argued that the price of the management services provided by Högkullen to its subsidiaries was below the open market value and decided to revaluate and increase the VAT taxable amount accordingly. They argued that the management services should be considered as a single, unique supply of services and that the open market value should align with the full costs incurred. Conversely, Högkullen argued that the services should be assessed separately and that a comparison can be made with equivalent services on the open market.

The Swedish Court sought clarification from the Court of Justice of the European Union (‘CJEU’) on whether it can be assumed that no comparable supplies for these management services exist on the open market. Additionally, they requested guidance on whether total expenditures, including costs of raising capital and shareholder expenses, should be included in the cost price to determine the open market value.

CJEU ruling

The CJEU ruled that each component of the services appears to have their own identifiable character. The fact that a single fee is charged cannot be decisive to consider these services as one single supply in intra-group supplies, as this would enable the group to influence this classification. Consequently, the application of Articles 72 and 80 of the VAT Directive precludes the management services provided by a parent company to its subsidiaries from always being treated by tax authorities as a single unique supply. Such treatment would otherwise exclude the use of the comparability method to determine the open market value.

The second preliminary question addresses the cost-based method of determining the open market value in the absence of comparable services. As this question is based on the premise that the management services concern a single, unique supply without comparable services freely available on the market, quod non, the CJEU sees no need to answer this question.