Are intercompany services and recharged salary costs subject to VAT?
Within groups of companies, it is common practice that services are charged by a parent company to one or more of its subsidiaries. The question is whether VAT should be added to the recharge.
In a recent matter brought before the European Court of Justice (ECJ) (Nr. C 94/19 of 11 March 2020), an Italian parent company seconded one of its directors to an Italian subsidiary. In that context, the latter received invoices from its parent showing amounts corresponding to the costs incurred for the seconded manager. When reimbursing the parent company for the costs relating to the secondment, the subsidiary applied Italian VAT and deducted this afterwards.
The Italian tax authorities took the view that these reimbursements fell outside the scope of VAT since they do not concern a supply of services between a subsidiary and its parent company. As a result, it made an adjustment in order to recover the VAT previously deducted.
According to Italian tax law, if the reimbursed amount corresponds to the total cost incurred for the seconded staff, the secondment is irrelevant for VAT and therefore is not subject to it.
The Corte suprema di cassazione (Supreme Court of Cassation) asked whether Italian tax is in line with the VAT Directive and decided to refer the matter to the ECJ for a preliminary ruling.
The ECJ reminded it is settled case law that VAT taxable transactions presuppose the existence of a transaction between the parties in which a price or consideration is stipulated. In case the activity consists exclusively in providing services for no direct consideration, there is no basis of assessment and the services are therefore not subject to VAT.
The above requires a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance. This is the case if there is a direct link between the service supplied and the consideration received. In the case at hand, it is obvious that the secondment of the director by the parent was a necessary condition for the payment made afterwards by the subsidiary. The two services are mutually dependent on each other.
The ECJ therefore concludes that the transaction should be regarded as having been carried out for consideration and the payment should be subject to VAT, irrespective whether the payment done by the subsidiary was equal to, higher or lower than the actual employment cost of the director. In other words, whether the recharge is ‘at cost’ or a markup is applied is not relevant for VAT purposes.
Under VAT rules this constitutes a supply of services, similar in case a recruitment agency would provide a temporary worker, and VAT must therefore be added.
While the above decision concerns an Italian VAT matter, the ECJ’s reasoning obviously applies to any recharge of employment costs (or intercompany services in general) within the EU. In most cases both companies will be VAT registered and any VAT charged by one will be recoverable by the other, so it is more a matter of admin than a cost. In a cross-border context, the VAT would be handled in the country of the beneficiary of the service under the ‘reverse charge’ mechanism.