ECJ Ruling Limits VAT Assessment of Parent-Subsidiary Services

The case between Hogkulle, a Swedish-based company, and the Swedish Tax Authority examines how services provided by a parent company to its subsidiaries, specifically in the context of active management, should be treated from a VAT perspective. The main point of dispute between these two parties is the disagreement on the valuation of intra-group services and the application of the EU VAT Directive’s provisions on taxable amounts and open market value.

Background of the Case 

Hogkullen, as the parent company of a real estate management group, actively managed its subsidiaries and, in 2016, provided them with various services, including business management, financial services, real estate management, investment, IT, and staff administration, totaling SEK 2.3 million (approximately EUR 204,200). The total amount charged for these services was subject to VAT.

The service price was calculated by using the “cost-plus” method, which added a profit margin to the actual costs incurred. Service-related costs were determined by using an allocation that attributed a percentage of general business expenses, such as office space, telecom, IT, corporate hospitality, and travel, to the services provided.

However, the calculation did not include shareholder-related costs such as preparing annual accounts, audits, general meetings, capital raising, and expenses linked to planned share issuance and stock exchange listing, as these were not considered connected to the services provided to subsidiaries.

In 2016, the company incurred a total cost of nearly SEK 28 million (around EUR 2.5 million), with about half of the cost subject to VAT and the other half exempt from VAT or considered non-taxable. However, Högkullen deducted the full input VAT on all costs where VAT had been charged, including on expenses categorized as ‘shareholder’ costs.

Nevertheless, the Swedish Tax Authority argued that the company charged its subsidiaries a price below the open market value for the services provided. Moreover, due to the lack of comparable services available on the open market, the authority assessed the taxable amount based on Högkullen’s total costs for that year.

Following the Administrative Court of Appeal's decision to uphold the Tax Authority's view, the company submitted an appeal to the Supreme Administrative Court. The Supreme Administrative Court acknowledged that the parties disagree on whether the first paragraph of Article 72 of the VAT Directive, which defines the open market value as the amount a customer would pay under fair competition to an independent supplier for the same service, should apply.

While Hogkullen argues that its services to subsidiaries should be assessed separately, and that comparable services exist on the open market, the Tax Authority claims that the parent company’s management of its subsidiaries is a single, integrated service that has no comparable equivalent between independent parties.

Given the uncertainties, the Supreme Administrative Court decided to refer two questions to the European Court of Justice for a preliminary ruling.

Main Questions from Request For Ruling

The first question referred by the Supreme Administrative Court to the ECJ asks whether, in applying national rules on adjusting the taxable amount, it is compatible with Articles 72 and 80 of the VAT Directive always to treat the services a parent company provides to its subsidiaries as unique, such that their open market value cannot be determined through comparison under the first paragraph of Article 72.

Additionally, the Supreme Administrative Court sought clarification on whether it is compatible with those same VAT provisions to treat all of a parent company’s expenses, including capital-raising and shareholder-related costs, as part of the cost of providing services to subsidiaries when the company’s sole activity is managing those subsidiaries and it has claimed full input VAT deductions on its purchases.

Applicable EU VAT Directive Article

The ECJ highlighted four articles from the EU VAT Directive as the most relevant ones for answering these two questions. The first one is Article 1(2), which emphasizes that the VAT system is a general consumption tax applied proportionally to the price of goods and services, regardless of the number of transactions that occur throughout the production and distribution chain before the final sale.

Articles 72 define the open market value as the total amount a customer, under fair competition conditions and at the same stage of the market, would pay to an independent supplier in the same EU country to obtain the same goods or services. Furthermore, Article 73 states that the taxable amount for supplies of goods or services must include everything received or to be received by the supplier from the customer or a third party as a fee, including subsidies directly linked to the supply’s price.

Under the provision of Article 80(1), EU countries may take measures to ensure the taxable amount reflects the open market value in certain situations involving close relationships, such as family, management, ownership, financial, or legal ties, where tax evasion or avoidance is a concern. Additionally, such measures may be applied when the fee for a supply of goods or services is lower than the open market value, and the recipient does not have full VAT deduction rights.

Sweden National VAT Rules

The ECJ noted that at the time the dispute occurred, Articles 72, 73, and 80 of the EU VAT Directive were incorporated into Swedish legislation through Chapter 1, the first paragraph of Article 9, and Chapter 7, Articles 2, 3, and 3a of the national VAT law.

Other provisions from the VAT law or any other complementary law were not highlighted as essential for making the decision in this case.

Importance of the Case for Taxable Persons

Since the case addresses whether Tax Authorities can treat all intra-group management services as a single indivisible supply, the arguments and conclusion from this case are critical for multinational groups and parent-subsidiary structures. The decision by the ECJ affects how VAT is calculated and recovered on services provided within corporate groups, which may have significant implications for VAT compliance and finances. 

Analysis of the Court Findings

When reviewing the first question, the ECJ noted that the Supreme Administrative Court seeks clarification on whether the EU VAT Directive prevents Tax Authorities from always treating services provided by a parent company to its subsidiaries, as part of their active management, as a single supply whose open market value cannot be determined by using the comparison method.

The ECJ added that, under the general rule, the taxable amount for goods or services is the actual fee agreed upon between the parties and received by the supplier rather than an objectively estimated value, such as a market or reference price, as determined in previous case law.

Nevertheless, Article 80(1)(a) of the EU VAT Directive provides an exemption from the general rule, allowing EU countries to use market value as the taxable amount to prevent tax evasion or avoidance, provided specific conditions are met. For this exemption to apply, three conditions are relevant: the transaction involves close ties, such as management or ownership, the price is below market value, and the recipient of the supply cannot fully deduct VAT.

While examining all the facts of the case, the ECJ determined that two of the three stated conditions are satisfied regarding the services Högkullen provided to its subsidiaries. There are management ties between the parties, and the subsidiaries do not have full VAT deduction rights. However, whether the third critical condition is satisfied, which concerns whether a fee is below the open market value, remains uncertain.

Notably, the Tax Authority argued that the open market value cannot be determined using a standard method. The primary argument in support of this conclusion is that active management by a parent company offers a unified service that is not available from independent parties on the open market.

The ECJ stated that it is well established in case law that when a transaction involves multiple elements and actions, all circumstances must be considered to determine whether, for VAT purposes, it should be treated as several distinct supplies or a single one. Even though each transaction is generally treated as independent, if a transaction is viewed from an economic perspective as a unified supply, it should not be artificially divided, as this would distort the VAT system.

Moreover, even services that could theoretically be provided separately must still be treated as a single supply if they are not independent of each other. This may occur when the transaction includes one primary service and several other merely ancillary services. In such cases, the ancillary services are subject to the same VAT treatment as the primary service.

Therefore, the fact that a single price is charged and paid, or an agreement between parties sets separate prices, does not determine whether a transaction involves multiple distinct supplies or just one single supply for VAT purposes.

Regarding the services that Hogkullen provided to its subsidiaries, the ECJ noted that they were not closely connected. This was supported by the Advocate General's opinion, which stated that each service has its identifiable character, even when provided together. 

The Advocate General added that even though subsidiaries pay one price for all services offered by the parent company, this does not determine how the supplies are classified for VAT. Moreover, allowing such a practice would enable the group to influence VAT treatment solely through the structure of its payment arrangements.

Courts Final Decision

In the end, the ECJ only provided an answer to the first question, stating that there is no need to answer the second one, as the idea that the services provided by a parent company to its subsidiaries always constitute a single supply cannot be accepted.

Therefore, the ECJ concluded that provisions from the EU VAT Directive, specifically Articles 72 and 80, must be interpreted to prevent Tax Authorities from always treating services provided by a parent company to its subsidiaries during active management as a single supply. In practical terms, this means that Tax Authorities cannot, in every case, exclude the possibility of determining the open market value of those services using the comparison method.

Conclusion

The ECJ's decision limits the ability of Tax Authorities to impose higher taxable amounts based solely on the structural relationships within corporate groups. More specifically, Tax Authorities may not universally treat services provided by a parent company to subsidiaries as a single supply that precludes market comparison methods. Consequently, Tax Authorities must assess each service individually to determine whether it constitutes part of a single economic supply or should be treated separately for VAT purposes.

Source: Case C‑808/23 - Högkullen AB v. Tax Agency, EU VAT Directive