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International Tax Review
March 2008 -
Achieving clarity on VAT for holding companies
Bruno Gasparotto, VAT principal of Arendt & Medernach, says that recent
European Court of Justice cases have muddied the water on the VAT recovery
principles of holding companies
Bruno Gasparotto
In recent years, the European Court of Justice (ECJ) has repeatedly been
asked to clarify the VAT treatment of holding companies. The mere
acquisition and holding of shares is not to be regarded as an economic
activity within the meaning of Directive 2006/112/EC of November 28 2006
(the VAT Directive). Pure holding companies will not be treated as taxable
persons for VAT purposes and they do not have any right of input VAT
deduction. But the VAT treatment of holding companies performing both
economic and non-economic activities that is, mixed holding companies is
more complex.
In the light of the Cibo and Kretztechnik cases (respectively C-16/00 and
C-465/03), it appeared that expenditure incurred by a holding company
regarding services purchased in connection with the acquisition of a
shareholding in a subsidiary or with the issue of shares, forms part of its
general costs. Such expenditure therefore has a direct and immediate link
(in principle) with the business as a whole. So if the holding company only
performs taxed transactions in the context of its economic activity, it
benefits from the right to fully deduct VAT charged on the expenses
incurred.
In a new case (C-437/06), Advocate General Mazak (AG) recently delivered an
opinion. The ECJ has been asked to clarify how a holding company, which
engages simultaneously in business and non-business activities, should
determine its right of deduction of the input VAT related to the expenditure
connected with the issue of shares.
Securenta Gttinger Immobilienanlagen is engaged in both economic activities
(up to about 45% of its total turnover) and non-economic activities,
including income from dividends and sales of securities. The German tax
authorities rejected the recovery of the input VAT incurred on expenditure
connected with the issue of shares, and allowed a partial deduction of the
outstanding input VAT in a proportion calculated in accordance with the
economic activities.
Securenta contested this decision. Referring to the Kretztechnik case, it
argued that all input VAT incurred in connection with the issue of shares is
deductible, as it increases its capital for the benefit of its economic
activity in general.
The AG started by pointing out that, in accordance with the principle of
neutrality, for the VAT to be deductible the input transactions must have a
direct and immediate link with the output transactions giving rise to the
right of deduction. This need for a direct and immediate link, as an
essential condition for the implementation of the right to VAT deduction,
was introduced by the BLP case (C-4/94). The ECJ later softened it,
particularly in the Kretztechnik case.
In the Kretztechnik case, the ECJ held that in view of the fact that a share
issue is an operation not falling within the scope of the Sixth Directive it
must be considered that the costs of the supplies acquired by that company
in connection with the operation concerned form part of its overheads and
are therefore, as such, component parts of the price of its products. Those
supplies have a direct and immediate link with the whole economic activity
of the taxable person. The ECJ ruled that Kretztechnik was entitled to
deduct all VAT charged on the expenses incurred in the context of the issue
of shares, as long as all the transactions carried out by Kretztechnik were
taxed transactions.
The AG emphasised that Securenta's situation did not compare to the
situation in Kretztechnik. Kretztechnik only performed taxed supplies, but
Securenta performed economic and non-economic activities simultaneously. It
follows that the deduction of input VAT on the expenditure connected with
the issue of shares was not justified unless the collected capital was
allocated to Securenta's economic activity. Such expenditure, if
attributable to the non-economic activity, does not lead to any VAT
deduction.
Accordingly, and in contrast to the Kretztechnik case, the AG stated that
Securenta's costs connected with its issue of shares were not overheads that
solely affected its economic activity. It was clear that these costs had an
effect on its non-economic activity, at least in part. So they had no direct
link with the general economic activity of Securenta. The position adopted
by the AG does not contradict the ECJ ruling in the Kretztechnik case, as a
full deduction is only possible if all the transactions undertaken by the
taxable person in the context of his economic activity are taxed
transactions.
The AG concluded that when a taxable person simultaneously engages in an
economic and a non-economic activity, the VAT deduction on expenditure
connected with the issue of shares is allowed only if that expenditure is
correctly attributed to that person's economic activity, within the meaning
of the VAT Directive. As the AG concluded for a proportional deduction of
the input VAT, a method of apportioning input tax between economic and
non-economic activities remains to be determined. Because the VAT Directive
provides no rule for such a method, it lies within the discretion of the
member states (under the principle of fiscal neutrality).
According to the AG's opinion in the Securenta case, the full deduction of
VAT on expenses related to the issue of shares is to be challenged, since an
apportionment of input tax between economic and non-economic activities is
necessary before calculating any pro rata between taxed and exempt
activities. More generally, this case shows the impact of the performance of
a non-economic activity and an economic activity on the right of VAT
deduction.
More than ever, such sensitive questions are highly relevant for finance and
investment structures, especially considering the substantial amounts of
fees paid in the private equity industry. Should the ECJ follow the opinion
of the AG, mixed holding companies that ignore the impact of the
non-economic activities on their right of VAT deduction (according to the
ECJ's reasoning in the Cibo case) would need to consider the adverse
consequences.
Bruno Gasparotto of Arendt & Medernach
http://www.internationaltaxreview.com/includes/magazine/PRINT.asp?SID=702813
&ISS=24584&PUBID=35
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