EU Ruling on VAT and Transfer Pricing in Intra-Group Transactions

The Court of Justice of the European Union (“CJEU”) has ruled that intra-group services provided by a parent company to its subsidiaries should generally be regarded as separate services for VAT purposes, with the market value determined separately for each service. The CJEU thereby rejects the Swedish Tax Agency’s current application of the rules.

Background 

The case concerns the Swedish company Högkullen AB, which was the parent company in a property group with several property-owning subsidiaries. The parent company’s sole activity was to provide intra-group services to its subsidiaries, including management, financial services, property management, investments, IT services, and HR administration. The parent company invoiced its subsidiaries for these services, which were subject to VAT. When calculating the price for the services, the parent company excluded costs considered to be shareholder costs, including only those costs attributable to the invoiced services, with a profit mark-up according to the Group’s transfer pricing policy. The parent company’s revenue for the relevant year was about SEK 2.3 million (excluding VAT), while costs amounted to about SEK 28 million (excluding VAT). The issue in the case was whether the Swedish Tax Agency, based on the VAT Act’s revaluation rules, had the right to impose additional output VAT on the parent company for the services provided. 

The revaluation rules mean, in short, that for transactions between related companies (such as group companies) where one of the companies has limited VAT deduction rights, a market-based price must be applied for VAT purposes. Otherwise, the Tax Agency can revalue the VAT base to the market value. It should be noted that the revaluation rules may apply even if group contribution rights exist between the companies for income tax purposes.  

The VAT Act has its own definition of market value, which is primarily the price a buyer would pay to an independent seller for a comparable good or service. If no such comparable transaction can be established, the market value is instead the seller’s purchase or cost price. 

The Tax Agency considers that in intra-group transactions, there is almost always a lack of comparable transactions, and therefore the market value should be determined based on the parent company’s cost price, including all costs, even the so-called shareholder costs. 

The CJEU’s Judgment 

The CJEU ruled that the services provided by the parent company cannot, in principle, be considered so closely linked that they objectively constitute a single indivisible economic supply for VAT purposes.  

As a result, the CJEU found no reason to answer the second question posed regarding which costs should be included when applying the directive’s alternative rule for determining market price based on the seller’s cost price. 

Comments 

The CJEU’s judgment is a clear rejection of the Swedish Tax Agency’s application of the revaluation rules. The Tax Agency has argued in this and many other cases that a parent company, to avoid the risk of revaluation of the VAT base, must essentially invoice all its costs to its subsidiaries.  

The CJEU’s judgment instead indicates that services provided by a parent company to its subsidiaries should generally be regarded as separate services for VAT purposes, and that the Tax Agency must therefore investigate the market price for each individual service to apply the VAT Act’s revaluation rules. It remains to be seen what conclusions the Supreme Administrative Court of Sweden, which referred the questions to the CJEU, will draw from the CJEU’s judgment. However, the judgment clearly rejects the Tax Agency’s formulaic and unpredictable application of the VAT Act’s revaluation rules.