(CJEU, Jul. 16, 2015, cases C-108/14 and C-109/14, Larentia and Minerva)
Although tax doctrine appears to be in agreement that mixed holding companies which have shareholding portfolios and perform services for their subsidiaries have to be considered as full businesses for VAT purposes, in a decision on June 27, 2012, Ginger, the French Administrative Supreme Court, added some confusion to the issue. Indeed, in Ginger, the Court ruled that, when a taxpayer had both economic and non-economic activities, VAT on investment and operating expenses incurred both for activities within and outside the scope of VAT was deductible insofar as such expenses could be attributed to the taxpayer's economic activities and if the method used for calculating the allocation criteria objectively reflected the actual share of expenses to each activity.
For deducting VAT on mixed expenses (e.g., €20), such a position meant that a holding company had to make an initial allowance, before application of the pro rata deduction amount, to take into account the allocated share of its activity not subject to VAT (e.g., €1.4, i.e., 7% of €20). Then, the holding company had to make another allowance on the balance of the deductible VAT (93% of VAT, i.e., €18.60, in our example) based on the pro rata deduction amount (equal to: taxable turnover ÷ [total turnover - (financial income and incidental real estate income)].
Prior practice consisted of directly applying the pro rata deduction amount without the prior allowance. As is often the case, and contrary to our example, the pro rata deduction amount is equal to 100%. The Gingerdecision, therefore, brings about a loss of deductible VAT for a number of mixed holding companies and even increases the said losses for others.
Confronted with an identical issue, the CJEU has just made a ruling in favor of this practice, as it held that a company can deduct VAT on the costs of acquiring shareholding in subsidiaries it manages, only within the limit of its pro rata deduction amount, insofar as such expenses are overhead costs related to all of its tax-paying operations. As a result, the prior allowance, which was supposed to take into account the fact that the holding company is also a shareholder, is not necessary. It should be noted that the CJEU's reasoning does not exclude the possibility of prohibiting deduction of VAT if it is shown (but this is not the case of the expenses at issue) that the expense is exclusively attributed to an activity not subject to VAT.
Beyond this technical outcome, which is of great importance since it puts an end to use of the Ginger decision in tax audits, we also point out the implicit reaffirmation of another idea already contained in another recent CJEU decision (CJEU, Jul. 17, 2014, case C-438/13). In this decision, although income that is not the financial consideration for a delivery of goods or services is not subject to VAT (on this basis, the income is outside the scope of VAT and is not counted as part of the turnover), the income is still within the scope of the company's economic activities. In our opinion, this analysis does has some practical incidence because it leads to placing limits on the right to make a deduction, which could apply to expenses related to this kind of income among exceptions to the principle of deductibility, subject to the existence of precise legislation to be interpreted narrowly (e.g., as precise legislation exists for company gifts: Article 257.II.1.1° of the FTC). Conversely if the income had been placed within the framework of a non-economic activity, the principle of non-deductibility could have or should have prevailed
In addition, two decisions by the Versailles Administrative Court of Appeal should be noted. These two cases involved calculating a mixed holding company's pro rata deduction amount. The Court of Appeal ruled that the companies were required to include in the pro rata denominator any interest received from holding bonds convertible into shares (BCSs) and the proceeds from selling the shares. In the first case, the interest was not deemed to be either income outside the scope of VAT or incidental financial income. In the second case, by using a CJEU decision (Nordania Finans, case C-98/07, Mar. 6, 2008) as its grounds, the Court of Appeal ruled that the shares sold could not be deemed fixed assets that could be excluded from the calculation of the pro rata deduction amount (Versailles Administrative Court of Appeal, no. 13VE1473, SAS ACG Holding, Jul. 21, 2015, and no. 14VE02731, SA Débéo Finance, Jun. 23, 2015).