Court of Justice clarifies VAT treatment of open market value for intra-group services

The broader discussion about the relationship between TP and VAT has been going on for some time. Where TP looks at (a market-based) profit allocation at group level, VAT looks at individual transactions. In practice, these different perspectives lead to friction.

Following the judgments in C-527/23 Weatherford Atlas Gip (deduction of VAT on intra-group services) and C-726/23 Arcomet Towercranes (VAT treatment of TP offsets), the judgment in C-808/23 Högkullen addressed a different question: how do you determine the taxable amount for VAT purposes when related parties agree on a price that the tax authorities consider to be lower than the open market value?

‘Open market value’ is the market price that a customer would pay to an independent supplier for the same goods or services at a given time, under normal conditions of competition. It is therefore the price that would apply if the parties were not related.

In Högkullen, the Swedish tax authorities stated that the active management by a parent company always constitutes a single, indivisible, group-specific service. Since, according to the administration, such an overall package cannot be compared with market performance, the open market value could not be determined by the usual market comparison method. Therefore, the Swedish tax authorities wanted to determine the open market value using a cost-based approach, whereby the taxable amount was increased on the basis of all the costs borne by Högkullen in that year (2016).

In Högkullen, the Court rejected that automatic approach and emphasised that it was first necessary to examine which specific services were actually provided and whether they should be assessed separately. Only then can it be assessed whether a market comparison is possible.

The facts

Högkullen AB is the Swedish parent company of a real estate group. In 2016, it provided active management services to its subsidiaries, including in the areas of business management, finance, property management, investments, IT and personnel administration. For those intra-group services, Högkullen invoiced a management fee of approximately SEK 2.3 million (approximately EUR 204,200), plus Swedish VAT.

The remuneration for these services was determined using a cost-plus methodology, whereby only the costs directly related to the provision of operational and support services to the subsidiaries were included in the cost base (such as management and office-related costs).

Certain costs were explicitly not recharged, in particular the so-called shareholder costs. These included costs related to the legal obligations of the parent company as a shareholder, such as the preparation and auditing of the financial statements, costs related to general meetings and capital structure, as well as costs related to a planned share issue and stock exchange listing.

The non-passing of these shareholder costs is in line with the usual transfer pricing practice, as such costs are not considered to be reimbursable services to group companies, but arise from the mere status of shareholder.

However, the Swedish tax authorities took the view that the remuneration invoiced by Högkullen was below the open market value. They considered the Shareholder costs that were not recharged were also taken into account.

The questions referred to the Court

The Swedish court referred the following two questions to the Court of Justice for a preliminary ruling:

• Is it compatible with Articles 72 and 80 of the VAT Directive for a parent company to provide services such as those at issue in the present case to its subsidiaries, for the purposes of applying the national provisions on the adjustment of the taxable amount, to be regarded as [intra-group specific services] the open market value of which cannot be determined by a comparison as provided for in the first paragraph of Article 72 of that directive?
• Is it compatible with Articles 72 and 80 of the VAT Directive for the purposes of applying the national provisions on the adjustment of the taxable amount to be regarded as having the total costs incurred by a parent company, including the costs of raising capital and shareholder costs, to constitute costs incurred by the parent company in providing services to its subsidiaries, where the sole activity of the parent company is the active management of its subsidiaries and it has deducted all input VAT on its acquisitions?

The referring court essentially seeks clarification on two points. The first question that arises is whether the Swedish tax authorities are entitled to systematically treat intra-group services supplied by a parent company to its subsidiaries as a single group-specific supply, which would preclude a comparison with market prices. In addition, the court asks whether, if one would have to fall back on a cost approach, the tax authorities may then include all costs of the parent company when determining the open market value, including capital collection and shareholder costs.

Judgment of the Court of Appeal

The Court first reaffirms some key principles of the VAT Directive 2006/112/EC: the taxable amount for VAT purposes is in principle the consideration actually agreed (Article 73 of the VAT Directive). The ‘open market value’ is an exception and can only be used under the conditions of Article 80, in particular to prevent fraud or avoidance by related parties.

The Court then focuses on the first question referred to. At the heart of the dispute was the Swedish tax authority’s argument that the inward management of a parent company must always be regarded as a single, indivisible service. The authority considers this overall package

The Court rejects that automatic approach. In order to determine whether there is a single supply or several separate supplies, it is necessary to take into account the economic reality and the settled case-law on complex supplies. The fact that a parent company offers several services together and charges a total price for them is not sufficient to conclude that there is always a single supply.

On the contrary, the Court indicates that the services at issue in the present case in the fields of business management, finance, property management, investments, IT and personnel administration appear, in principle, to have their own distinct and recognisable character. The Swedish tax authorities could therefore not simply state that comparable services never exist on the open market. A service-by-service analysis remains necessary, and only then can it be assessed whether or not the method of comparison with market performance in the first paragraph of Article 72 is appropriate.

The Court did not ultimately answer the second question, because it was based on the assumption that, in the case of active management by a parent company, there is by definition no comparable market performance. Since the Court rejects that assumption, the second question is no longer necessary.

What does this mean for companies?

This judgment is particularly relevant for groups of companies where management fees and other central services are recharged on a cost basis and which also have to deal with entities with a limited right to deduct VAT (e.g. in the real estate, financial or holding sphere). In such cases, the tax authorities may be likely to raise the taxable amount for VAT to an “open market value”. The judgment in Högkullen makes it clear that that exercise cannot be carried out just like that but must be based on an assessment of the services actually provided.

In concrete terms, this means that an intragroup management fee may not be assessed solely at group level. For VAT purposes, it must be possible to clearly demonstrate which specific services are supplied, how those services are to be economically classified and why they may or may not be assessed separately.

Finally, this judgment also illustrates that a TP methodology (such as cost plus) is not automatically decisive for the VAT analysis. TP and VAT can be based on the same set of facts, but the legal test remains different. Thus, a correct TP calculation does not alter the fact that, for VAT, it is necessary to examine separately whether the taxable amount complies with the relevant rules of the VAT Directive.

What can you do now?

Groups of companies with intra-group services would do well to critically review their VAT position in the light of the Högkullen judgment. The following points should be paid particular attention to:

• Provide a clear description of the individual intra-group services. A global management fee can be perfectly defensible, provided that the underlying services are sufficiently clearly elaborated and documented in the intra-group agreements.
• Align TP documentation, intra-group agreements and VAT invoicing in terms of content. VAT invoices can refer to a management fee, provided that they are in line with an intra-group agreement (ICO agreement) in which the nature, scope and economic reality of the services provided are concretely laid down.
• Explicitly substantiate why certain costs, such as shareholder costs, are or are not recharged. Costs arising from the status of shareholder do not, as a rule, constitute reimbursable services to group companies.
• Pay particular attention to entities with limited VAT deductibility rights, as they are more likely to be subject to a revaluation of the taxable amount for VAT.

The judgment confirms that the VAT analysis must be based on the concrete economic reality of the services provided and not on general assumptions.

Do you want to check whether your intra-group allowances, both TP and VAT, hold up in the light of this case law?
Our specialists at Van Havermaet will be happy to work with you to find out how your current documentation and invoicing flows can be substantiated.