There has been ongoing discussions surrounding deduction of input VAT by holding companies for some time. There are three different type of holding companies:
- finance holding: holds and manages its shareholdings without providing services;
- management holding: actively involved in the day to day business of its subsidiaries; and
- mixed holding: only involved in the management of a few of its subsidiaries.
As a finance holding is not providing vatable services, it cannot deduct input VAT. A mixed holding can deduct input VAT to the extent that it relates to services received in connection with their active involvement in the management of its subsidiaries.
The European Court of Justice has now decided a case which had been referred by the German Federal Supreme Tax Court in December 2013. This case relates to a management holding. This holding is a fund with a total equity of 25 million Euros of which 20 million euros were invested in two subsidiaries. The tax authorities and the tax court did not allow full deduction of input VAT for services in connection with winning investors and preparing a prospectus. The holding company just provided minor services to its two subsidiaries for which it generated fees of about EUR 300k per year. The Federal Supreme Tax Court confirmed this approach and referred the case to the European Court of Justice.
The ECJ disagreed with the German tax authorities and the German tax courts and held that all input VAT in connection with the acquisition of both subsidiaries (which included costs in connection with winning investors in order to finance this acquisition) could be deducted as input VAT.