Recovery of input VAT on costs relating to the acquisition and the holding of shares in subsidiaries has been a point of discussion for many years now. As a result, Holding companies are often denied to recover this input VAT and thus, are faced with additional costs. The recent Larentia + Minerva / Marenave (C-108/14) ruling of the Court of Justice of the EU ("CJEU") clarifies the VAT position of Holding companies with regard to costs incurred for the acquisition and holding of shares in subsidiaries (e.g. legal-, advisory- and due diligence costs). The CJEU takes an approach that is more beneficial for Holding companies in comparison with the strict approach that most tax authorities throughout the EU take with regard to the recovery of input VAT relating to the acquisition and holding of shares by Holding companies. 

Introduction

On the basis of CJEU case law, a Holding company that solely acquires and holds shares in a subsidiary, without direct or indirect involvement in the management of that subsidiary, does not have the status of a VAT taxable person and cannot recover VAT it has been charged with. The holding of shares in a subsidiary as such does not qualify as an economic activity from a VAT perspective.

However, if the holding of shares is accompanied by direct or indirect involvement in the management of the subsidiary against remuneration, the acquisition and holding of shares is considered to be an economic activity for VAT purposes. As a result, the Holding company can recover input VAT insofar the costs relate to VAT taxable activities.

Although this approach appears to be straightforward and easy to apply, in practice Holding companies often face discussions with tax authorities with regard to the recovery of input VAT. This includes self assessed VAT under the "reverse charge mechanism", in case of services rendered by foreign service providers. Despite direct or indirect involvement of a Holding company in its subsidiary, some tax authorities still take the position that the holding of shares as such restricts the recovery of input VAT on acquisition costs.

Background

The German Holding companies Larentia + Minerva and Marenave Schiffahrt held shares in subsidiaries and were actively involved in the management of the subsidiaries by rendering administrative and business services. Both companies recovered 100% of the VAT on costs relating to the acquisition of the shares in these subsidiaries by claiming that they carried an economic activity by managing the subsidiaries.

The German tax authorities however denied the recovery of the VAT on the acquisition costs by taking the view that the Holding companies engaged in both economic and a non-economic activities. On this basis, only the proportion of VAT (pre pro rata) on the acquisition costs that relates to the economic activities can be recovered. The dispute was brought before the German national judge, who referred the case to the CJEU.

CJEU judgment

The CJEU ruled that costs relating to the acquisition of subsidiaries, incurred by a Holding company that is involved in the management of the subsidiary, are considered to be costs that relate to the economic activities of the Holding company. VAT on such costs can be recovered insofar the Holding company carries out VAT taxable activities.

This seems to imply that if the holding of shares by a Holding company is not accompanied by direct or indirect involvement in the management of the subsidiary, input VAT can be subject to a pre pro rata. In that regard, it is up to the EU Member States to establish rules regarding the application of such a pre pro rata.

Practical implications of the judgment 

VAT position of Holding companies

On the basis of this judgment, if the holding of shares by a Holding company is accompanied by a direct or indirect involvement by this Holding company in the management of the subsidiary against a remuneration, the Holding company in principle cannot be denied the right to recover VAT on costs that relate to the holding of these shares.

This may be different in the event a Holding company has several subsidiaries and is not directly or indirectly involved in the management of all subsidiaries. Tax authorities throughout the EU may still try to assert that it is necessary to allocate input VAT (i.e. apply a so called pre pro rata) to economic activities (direct or indirect involvement in subsidiaries) as well as non-economic activities (no involvement in subsidiaries) of the Holding company.

We note that, under circumstances, such approach by tax authorities could very well be disputed on the basis of CJEU case law and, in some EU jurisdictions (e.g. The Netherlands), local VAT regulations. Under circumstances, it is defensible to arguable that holding shares in a subsidiary, without a direct or indirect involvement in the subsidiary, also should not result in the Holding company being (partially) denied to recover input VAT.

Recommendations

When structuring a share deal, it is recommended to carefully consider whether the holding company will render management activities to the target and to document such intentions in the administration.

The Larentia + Minerva / Marenave judgment clarifies that in the event a Holding company does not directly or indirectly involve itself in the management in all of its subsidiaries, the VAT incurred on acquisition costs of a new subsidiary is nevertheless fully deductible if the Holding company does involve itself in the management in this new subsidiary. To date, in those situations most tax authorities did not allow a full deduction.

In practice, the VAT position of Holding companies remains a difficult matter. However, this latest ECJ ruling shows that Holding companies, under circumstances, should be able to deduct more input VAT than they are currently allowed. We therefore recommend to assess your approach on reorganizations, mergers, or share deals. A solid VAT planning with regard to the acquisition costs and the general costs relating to the holding of shares, will optimize the VAT position of the Holding company in question and thus save additional VAT costs.

In addition we note that, as a result of the Larentia + Minerva / Marenave judgment, there may be an opportunity to claim a refund for input VAT incurred on acquisition costs which was denied by the tax authorities. This may require that the Holding company secures its formal rights on a short term.