The decision handed down by the French Administrative Supreme Court in the Air Liquide case (appeal No. 350588 of June 24, 2013) upholding the right of a company to deduct the VAT relating to expenses in the acquisition of various sub-subsidiaries through another company of the same group, was one of the most interesting and innovative decisions in 2013. As a justification, the court emphasized the fact that the company which was claiming the recovery of the VAT was the sole company of the group in a position to supply various support service to the sub-subsidiaries, the direct parent company's role being limited to the passive role of shareholder.
The decision handed down by the Versailles Administrative Court of Appeal as a consequence of the preliminary ruling of the High Court is also of interest (Versailles Administrative Court of Appeal, Dec. 9, 2014, No. 13VE02573). Indeed, the Court of appeal has implemented the legal framework defined by the upper judges, but in a positive and negative sense, giving a full pictures of the consequences attached to the High Court's ruling. Positively, because it acknowledges the right of the company to deduct the VAT to the extent it was the only one having the expertise to directly provide support services to the sub-subsidiaries. Negatively because the Court denies to the company part of the deductible VAT because of the existence of other holding companies between the claimant and some of its sub-subsidiaries , acting as " regional hubs" and which were assumed playing the same role as the claimant at a regional level.
On the merits, this decision confirms a right to a deduction, but only provided that an analysis of the role of each intermediary company between the party claiming the deduction and the sub-subsidiary shows that there is no redundancy or competition between the services performed by each of them.
In our opinion, it is not certain that the decision of the Administrative Court of Appeal is safe from criticism when, as a condition for the recovery of the VAT by the holding company, it imposes a mere reinvoicing of the costs without further additions by the intermediary company. Indeed, it is hard to believe that the fact of including the services performed by the first company into the cost price of a services performed by the intermediary company could be an obstacle to the neutrality of the VAT. Indeed, the local production of services illustrates better the real economical role of the regional hub than the mere recharging of costs. This being said, no one doubts that the tax authorities will take the limits laid down by this decision into account and, for this purpose, it may be useful to review the transfer pricing documentation for identifying redundant expertise within a group that may justify limiting the right to deduct VAT on acquisition costs.