An interesting development as regards VAT deduction rights on shareholding acquisitions

The European Court of Justice (the "Court") ruled already in the past (see for instance Larentia-Minerva and Marenave cases: C-108/14 and C-109/14) that deduction rights were to be given to holding companies in relation to their acquisition of shareholdings in subsidiaries as long as they were involved in the management of such subsidiaries.

The recent Marle Participations case (C-320/17) is of great interest as it clarified the concept of management involvement in subsidiaries. Indeed, the question was here whether the letting of a building by a holding company to a subsidiary could be considered as a direct or indirect involvement in the management of that subsidiary and as such giving rise to a VAT deduction right. 

Background

In the present case, the holding company reorganised its underlying shareholding structure, including the sale and acquisition of subsidiaries. Whilst the holding company deducted all VAT restructuring costs as considering itself involved in the management of its subsidiary due to the letting to the latter of a building, the local VAT authorities and the lower local court denied such deduction, deeming the letting of a building by a holding company to its acquired subsidiary not as an involvement in the latter's management.

Statement of past principles

The Court initially recalled certain important past principles ruled in prior cases:  

  • the VAT deduction right is a fundamental principle of the common system of VAT that may in principle not be limited as long as two conditions are complied with: (i) the person concerned is a taxable person within the meaning of the VAT Directive, and (ii) the goods or services are not only supplied by another taxable person but also used by the taxable person to carry out taxable transactions;
  • the mere acquisition and holding of subsidiaries is not deemed an economic activity within the meaning of the VAT Directive; as such, it does not give the status of a taxable person to the holding company;
  • conversely, a holding company becomes a taxable person within the meaning of the VAT Directive as soon as the holding company is involved, directly or indirectly, in the management of its subsidiaries and that such involvement concerns itself a taxable activity; and
  • a direct or indirect involvement in the management of subsidiaries, which should give rise to a VAT deduction right, includes services rendered to the subsidiary such as administrative, accounting, financial, commercial, information technology and technical services.

Clarifications

The Court explained that the enumeration of services to be considered - based on past Court decisions - as a direct or indirect involvement in the management of subsidiaries and giving rise to a VAT deduction right (i.e., administrative, accounting, financial, commercial, information technology and technical services) is not exhaustive but must be understood as "all transactions constituting an economic activity, within the meaning of the VAT Directive, performed by the holding company for the benefit of its subsidiary."

As a consequence of the above, the Court ruled that the letting of a building by a holding company to its subsidiary is deemed an involvement in the management by the former in the latter, being as such considered as an economic activity conferring a VAT deduction right on expenses incurred by the holding company in relation to its acquisition of shareholdings in subsidiaries, provided that the following conditions are met:

  • the supply of services is made on a continuing basis;
  • the supply is carried out for consideration; 
  • the presence of a direct link between the supply and the consideration; and
  • the supply is not VAT-exempt.

The Court recalled that as long as a holding company is involved in the management of its subsidiaries and that such involvement concerns taxable services, any expenses linked to the acquisition of shareholdings in these subsidiaries is to be considered as a general expense and as such, the VAT paid on such expense must, in principle, be deducted in full. Conversely, the Court specified that in cases where the holding company was involved in the management of only some of its subsidiaries, expenses may be deductible only proportionally.  

Whilst remembering that the VAT deduction right may be refused if invoked for fraudulent or abusive ends, the Court also interestingly seemed to lay down the principle that to assess the deduction right of a holding company involved in the management of its subsidiaries in which it has bought shares, no balance may be made regarding the turnover generated on the one hand from the taxable service provided to such subsidiaries (here, the letting service) and on the other hand from its shareholding activity (e.g., dividend income). 

Conclusion

This case is in our opinion of great interest as it not only clarifies the notion of involvement in the management of a subsidiary but also takes a broad approach in respect thereof. Such large interpretation should enable holding companies to recover more often and more easily from the VAT authorities expenses incurred in relation to shareholding acquisitions if they provide taxable services to these acquired subsidiaries. Indeed, in the past, the VAT authorities have sometimes been reluctant to grant such VAT deduction right, in particular in cases where the VAT paid on the acquisition costs was higher than the VAT derived from the taxable services rendered by the holding company to its acquired subsidiary. This case should hopefully ease this kind of discussions.

Further, it is in our view noteworthy that the Court clarified that in the context of the assessment of the deduction right of a holding company involved in the management of its subsidiaries in which it has bought shares, no weighing scale should be made between the turnover realized on the one hand from the taxable service provided to such subsidiaries and on the other hand from its shareholding activity.  

Finally, this case is in our view also of great interest as it may provide arguments to consider that the VAT deduction right, available on acquisition expenses to holding companies involved in the management of its subsidiaries where such involvement concerns taxable services, may also be granted to such holding companies as regards their overall or disposal expenses.

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