In the Italian case at hand a parent company seconded an employee to its subsidiary and was reimbursed the costs it incurred. The subsidiary claimed the deduction of the input VAT charged by its parent company. Under Italian VAT legislation, the secondment of staff in exchange of only a reimbursement of costs is not considered to be falling within the scope of VAT. Therefore, the Italian Tax Authorities argued that VAT had been incorrectly charged by the parent company and was not deductible by the subsidiary.

The question raised by the Italian Supreme Court was whether the secondment of staff by a parent company in respect of which the subsidiary merely reimburses the related costs may be regarded as irrelevant for VAT purposes.

The CJEU’s reasoning

The CJEU recalled that a VAT taxable transaction requires that there be a legal relationship between parties pursuant to which there is reciprocal performance: the performance of a service, in exchange for the payment of a remuneration. This criterion is met when there is a direct link between the service supplied and the consideration received. It is settled case law that a direct link exists where a service (e.g. the secondment of staff) is supplied only on condition that the other leg of the transaction (e.g. the reimbursement of costs) is also made, and vice versa. The CJEU confirmed that the amount of the consideration, in particular whether it is equal to, greater or less than, the costs incurred by the supplier, is irrelevant.

The CJEU concluded that in case the reimbursement of costs is a condition for the secondment of an employee by a parent company to its subsidiary, then such secondment should be deemed to be performed for consideration and constitute a supply of services within the scope of VAT. The CJEU hence confirmed that secondment of staff against a strict reimbursement of associated costs is subject to VAT.

Practical implications

This outcome does not come as a surprise, and reflects the already existing practice in Luxembourg, the Netherlands and Belgium.

Group structures that rely on an affiliated entity to share the available human resources among the different operating companies are as a general rule obliged to charge VAT on the reimbursement of costs requested from the companies benefitting from the seconded staff. As a consequence, the seconding of staff for consideration by a group company should entitle that company to a VAT deduction right.

However, if the companies benefitting from the seconded staff cannot (fully) deduct input VAT due to the nature of their activities, non-deductible VAT on the seconded staff costs are suffered by them as a final cost. In that case, there may be possibilities in Luxembourg, the Netherlands and Belgium to prevent the application of VAT on secondment of staff.

While Switzerland is of course not bound by CJEU’s decision, the secondment of staff is generally also treated as a taxable service in the Confederation. However, Swiss VAT law provides for a specific rule for cross-border secondment of employees between companies of the same group. Subject to certain conditions, such group’s internal secondments remain outside the scope of VAT.