The recurring issue of VAT recovery by holding companies has been discussed again in two recent CJEU cases.
While the perennial questions around the exact boundaries of the right to recover VAT on costs related to the acquisition or disposal of subsidiaries are still being explored, the basic advice remains the same. Namely that companies should be in the best position to recover input VAT on their costs relating to subsidiaries if they ensure that:
(a) the companies are VAT grouped from the outset;
(b) a management services agreement is put in place which provides for a sensible level of consideration to be paid to the holding company for clearly specified services (which are actually provided by the holding company); and
(c) in the case of corporate acquisitions, VAT invoices are not issued to the group until (a) and (b) have taken place.
Marle Participations
In this French case, the CJEU was asked to rule on the question as to whether - and, if so, under what conditions - the letting of buildings by a holding company to a subsidiary constitutes direct or indirect involvement in the management of that subsidiary. If so, the acquisition and holding of shares in that subsidiary would be considered economic activities within the meaning of the VAT Directive such that associated input VAT would be recoverable.
The VAT which Marle Participations sought to deduct was charged on various expenses connected with a restructuring operation which involved sales and acquisitions of securities. The French tax authorities considered that these contributed to the implementation of capital transactions and therefore fell outside the scope of the right of recovery.
It is well recognised that a holding of shares in a company that is accompanied by direct or indirect involvement in the management of those companies can be an economic activity. However, such management is normally described as involving the supply to those companies of financial, commercial and technical services whereas the only supply here was that of the letting of land by the parent to its subsidiaries.
The CJEU considered that the term "involvement of a holding company in the management of its subsidiary" covers all economic activities performed by the holding company for the benefit of its subsidiary. As letting and leasing land can be VATable if the Member State in question has provided for the exemption for these activities to be waived, then the letting of land by a parent to its subsidiary does amount to an economic activity provided that the building is subject to an option to tax.
The CJEU also gave a reminder of the other conditions that must be met if VAT is to be recoverable in these circumstances:
- the supply of services must be made on a continuing basis;
- it must be carried out for consideration; and
- there must be a direct link between the service rendered by the supplier and the consideration received from the beneficiary.
Assuming these conditions are satisfied, the principles set out in Larentia + Minerva allow expenditure connected with the acquisition of shareholdings in subsidiaries incurred by a holding company carrying out an economic activity to be regarded as belonging to its general expenditure, with the VAT paid on that expenditure being, in principle, deductible in full.
Assuming these conditions are satisfied, the principles set out in Larentia + Minerva allow expenditure connected with the acquisition of shareholdings in subsidiaries incurred by a holding company carrying out an economic activity to be regarded as belonging to its general expenditure, with the VAT paid on that expenditure being, in principle, deductible in full.
C&D Foods
We would normally expect that the same principles would apply to the disposal of shares which ends a holding company's involvement in a subsidiary's management.
However, Advocate General Kokott, in her recent opinion in the case of C&D Foods (C-502/17; not yet available in English), has commented that if a direct and immediate link is established between the legal advice in question and the share disposal (an exempt transaction in itself), then the VAT incurred on the legal fees would not be deductible. AG Kokott here considered that where the main purpose of the advice was the disposal of the shares and the drafting of the share disposal agreement, a direct and immediate link is likely to exist.
This does not sit easily with the decision in the 2008 CJEU case of Skatteverket –v- AB SKF, which also looked at the VAT recovery position of costs incurred on the disposal of an actively managed subsidiary. In that case, the CJEU indicated that the parent company should be able to reclaim input tax on those disposal costs where they formed part of the company's general overheads.
It is to be hoped that the CJEU decision in C&D Foods – and also in Ryanair, a case concerning the VAT recoverability of costs related to an unsuccessful takeover bid, also the subject of an AG Kokott opinion – will clarify the conditions under which recovery of input tax is possible on the acquisition or disposal of shares (whether or not the transaction ultimately goes ahead), and allow businesses to proceed with more confidence in this area.
In the meantime, we would reiterate our general advice to: (i) include newly acquired entities within the VAT group; (ii) provide, charge for and document management services supplied to the subsidiary; and (iii) to be mindful of the progress of these steps before having invoices issued to the group.
