Larentia + Minerva: recovery of VAT by holding companies

The CJEU has ruled that a holding company that actively managed all of its subsidiaries did not need to apportion expenditure incurred on raising capital for the purpose of acquiring the subsidiaries between economic and non-economic activities.

This is a particularly helpful judgment for those looking to recover VAT costs on M&A transactions, and contrasts with HMRC's current approach to this issue.

Background facts

Larentia + Minerva is a shipping company that incurred input tax in raising capital from a third party which it used "to fund the acquisition of shareholdings in subsidiaries and [the provision of] services, in particular administrative and consultancy services, provided to those subsidiaries for remuneration". The subsidiaries took the form of limited partnerships.

The German supreme court considered that the input tax was used both for the services provided to the subsidiaries (referred to by HMRC as "business activities") and the acquisition of the shareholdings ("non-business activities") but could not decide how it should be apportioned.

Recovery of VAT by a holding company

The CJEU held that the holding companies' involvement in the management of the subsidiaries for consideration consisting of a management charge should lead to the conclusion that such holding companies carry out economic activities only, i.e. to the exclusion of any non-economic activity comprised of the investment in the subsidiaries.

This means that input tax incurred on the acquisition of subsidiaries would be recoverable in its entirety on the grounds that the only supplies made by such holding companies (i.e. ones who are involved in the management of its subsidiaries) were taxable supplies.

This contrasts with HMRC guidance, which stated that a holding company with some business activities, such as the provision of management services to its subsidiaries, and some non-business activities, would be able to recover input tax but only to the extent that the costs have a direct and immediate link to a taxable supply, i.e. the costs must be used for the purposes of the holding company's taxable supplies.

This decision overrides HMRC's guidance for holding companies with some business activities, e.g. those which provided management services, and enables holding companies to recover all input tax on acquisition costs (except, of course, where the services consist of VAT-exempt business activities, e.g. providing loans to the subsidiaries). This is clearly financially advantageous for such holding companies, and also avoids difficult determinations of how direct and immediate the link to the taxable supply needs to be.

Apportionment of the input tax would still be necessary where the input tax relates to the acquisition of multiple subsidiaries, only some of which are actively managed.

HMRC has yet to give its reaction to this part of the decision, which it references in VAT Input Tax Manual: VIT40100.

Restriction of VAT groups to corporate bodies

The CJEU also affirmed the Advocate General's opinion in this case that an EU Member State may not restrict membership of a VAT group to those having legal personality, unless that condition is appropriate and proportionate to prevent abusive practices or of tax evasion or avoidance.

This is important to the UK which also requires members of a VAT group to be corporates and subject to a relationship based on control. The UK could therefore be required to amend its VAT grouping rules to remove these restrictions and align the membership criteria more closely to those in the VAT Directive, i.e. close financial, economic and organisational links. A wider membership of VAT groups could then be possible.

Beteiligungsgesellschaft Larentia Minerva mbH & Co. KG -v- Finanzamt Nordenham and Finanzamt Hamburg-Mitte -v- Marenave Schiffahrts AG

Please click on the links below for the other articles in the September 2015 tax newsletter:

• Changes to fund returns
• Intelligent Managed Services: TOGCs and intra-group supplies
• Improving large business tax compliance - a consultation document
• Massey: VAT planning and abuse
• Qualifying private placement withholding tax exemption