Based on our tax audit experience and recent court rulings, it is clear that intra-group services are increasingly coming under scrutiny during tax inspections. Tax authorities now frequently assess the appropriateness of intra-group charges from the perspective of corporate income tax, VAT, and transfer pricing alike.
To prevent or mitigate potential tax audit risks, it is strongly advisable to carefully examine cost allocation, VAT deduction, and transfer pricing issues related to typical support services provided within multinational groups – such as IT, HR, accounting, or management services.
This is particularly important when group entities apply so-called “indirect invoicing” methods, where the consideration for services is allocated among group members based on a pre-defined allocation key (e.g. proportionate to revenue). In such cases, the link between the charged fee and the actual services received is often not transparent, which increases the risk that the tax authority may:
- increase the corporate income tax base of the cost-receiving company, and
- deny the related VAT deduction.
In several cases, tax authorities have even questioned the necessity or business rationale of certain services – often based on subjective criteria – and have challenged the invoicing of related costs. They may require the cost-receiving entity to prove the economic benefit and business relevance of the services.
Additional complexities may arise regarding the classification of management services as uniform or bundled services, which is primarily a transfer pricing issue. However, if not all parties involved are fully entitled to deduct VAT, the transfer pricing issue becomes a VAT matter as well.
What’s the Issue with Indirect Invoicing?
In practice, many companies face situations where tax authorities’ question:
- whether the company actually received the service from its related party, and
- if so, whether the allocated share of the cost genuinely served its own business activity.
This is especially common where the service – typically provided by the parent company – cannot be clearly linked to a specific performance or when the service was used by multiple group entities.
In recent years, the Hungarian tax authority has denied VAT deduction and expense recognition in several cases, arguing that:
- the service fee was not sufficiently substantiated, or
- it was not proven that the service served the Hungarian company’s economic activity.
What Does the European Court of Justice Say?
In the recent Case C-527/23 (Weatherford Atlas Gip SA), the Court of Justice of the European Union took a clear position on such cases.
Key ruling:
VAT deduction cannot be denied merely because:
- other group members also benefited from the service, or
- the service was not deemed “necessary” or “appropriate” – such terms reflect subjective judgement.
What matters is whether the service supports the taxable person’s own economic activity.
The Court confirmed that if the cost of the service forms part of the general overheads of the taxable person and is incorporated into the price of the goods or services it supplies, the right to deduct VAT exists in principle.
In our view, this logic also supports the eligibility of such costs for deduction as business expenses for corporate income tax purposes.
What Does This Mean in Practice?
VAT deduction and cost recognition for intra-group services used by multiple entities cannot be automatically denied.
There is no requirement to provide detailed cost allocation or prove the profitability of the individual transaction. Shared cost elements relating to services used by other group members do not preclude VAT deduction, as these are considered mere pricing components in determining the total consideration.
Tax authorities may request supporting documentation beyond the invoice, but only to a reasonable extent. Detailed evidence for every cost item is not required. However, appropriate documentation of internal services, clear explanation of the applied allocation key, and logical justification remain essential.
If your company receives services from within the group, it is worth seeking expert advice on the following:
- the validity and compliance of service agreements and invoices,
- the substantiation of indirect invoicing practices,
- documentation obligations regarding VAT deduction rights.
A thorough tax review can help identify and mitigate risks – before the tax authority does so.
To mitigate potential tax audit risks, it is recommended to carefully address cost allocation, VAT deduction and transfer pricing aspects of IT, HR, accounting and management support services provided among members of multinational corporate groups.
If you have any questions regarding the topics discussed, the tax advisory team of WTS Klient is always at your disposal.
This article provides general information and does not constitute advice.
