VAT deduction where VAT treatment differs between Member States
03/03/26
May an EU Member State refuse the right to deduct input VAT related to services that are VAT taxed in its own Member State, if that service is VAT-exempt in the Member State of the customer? That question has now been referred to the General Court of the EU ("GCEU") in case T-96/26 - TellusTax Advisory. On 26 January 2026, the Swedish Högsta förvaltningsdomstolen (Swedish Supreme Court) decided to refer a preliminary question on whether a Member State may refuse the right to deduct input VAT where the service is taxable in the Member State of establishment, but is exempt in the Member State of the customer as a result of a divergent implementation of the VAT exemption for the management of special investment funds (art. 135(1)(g) VAT Directive). The case concerns the Swedish company, TellusTax Advisory AB, which provides legal and administrative services to an FVC established in Luxembourg that carries out securitisation transactions and is classified there as a special investment fund.
What does this mean for your organisation?
This case is relevant for businesses that provide cross-border services within the EU, particularly where those services are VAT-exempt in the Member State of the customer on the basis of a national implementation of the EU VAT Directive. The answer from the GCEU will clarify whether the right to deduct input VAT in the Member State of establishment may be made dependent on the VAT treatment in the Member State of the customer.
This question is of particular relevance to the financial sector, where Member States have implemented, among others, the VAT exemption for the management of special investment funds (art. 135(1)(g) of the EU VAT Directive) in different ways. It is advisable to monitor the progress of this case and to assess whether your organisation supplies similar services where VAT deduction may be at stake.
Background
TellusTax Advisory AB provides transaction structuring services to a client that qualifies as a Financial Vehicle Corporation (FVC) with its registered office in Luxembourg. FVCs are entities that carry out securitisation transactions. The services would be VAT taxed in Sweden, but are not actually taxed there because the place of supply is in the Member State of the customer. In Luxembourg, however, the customer does not have to account for reverse-charged Luxembourg VAT, since the services are VAT-exempt under Luxembourg national legislation as management of special investment funds. The core of the dispute is whether TellusTax is entitled to deduct Swedish input VAT on costs that are related to providing these services.
Positions of the parties involved
Skatteverket (the Swedish Tax Agency) has lodged an appeal and argues that the VAT system requires that the deduction of input VAT attributable to intra-EU transactions must also be determined by taking into account whether VAT is due on those transactions in the Member State of the customer. If TellusTax were to receive a right to deduct VAT in Sweden for services that are VAT exempt in Luxembourg, while Luxembourg established businesses providing the same services would have no right to deduct VAT, this would create a competitive advantage that is contrary to the principles of equality and neutrality.
TellusTax Advisory AB argues that there is no basis in the VAT Directive for restricting the right to deduct in this scenario. The competitive advantage that could arise in Luxembourg stems from the differences between Swedish and Luxembourg VAT legislation, and this should not affect the right to deduct in Sweden. Moreover, refusing the deduction would in fact create a competitive disadvantage in Sweden compared to other Swedish businesses that provide similar services exclusively domestically.
The preliminary question
The Swedish Supreme Court argues that it is unclear how the judgment in Morgan Stanley & Co International (case C-165/17) should be interpreted in light of the current wording of art. 169(a) of the EU VAT Directive. It therefore refers the following question to the GCEU:
Is it compatible with art. 168(a) and art. 169(a) VAT Directive to refuse the deduction of input VAT for costs incurred by a taxable person in one Member State in respect of services supplied to a taxable person in another Member State, on the ground that the transaction is not taxable in that other Member State whereas it would have been taxable in the first Member State, where the differences in taxation result from the manner in which the Member States have transposed the exemption of art. 135(1)(g) VAT Directive?
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