On 26 March 2015, Advocate General (AG) Mengozzi issued his opinion in the joined European Court of Justice (ECJ) cases Larentia + Minerva and others1 . The issue at stake in these joined cases is the extent to which input tax on costs of a holding company, incurred in connection with the raising of capital, has a “direct and immediate” link to the economic activity of the holding company where the company actively manages its subsidiaries, and is therefore recoverable.
In each case, a German holding company held shares in limited partnership subsidiaries. The holding company provided administrative and business services to its subsidiaries for remuneration. The holding company in each case sought to recover input tax incurred in raising capital to fund the acquisition of the subsidiaries.
The German court took the view that in each case the input tax incurred by the holding company was in respect of both economic and non-economic activities of the holding company (limiting the input tax recovery). However the question of apportionment was referred to the ECJ. Also referred to the ECJ was a complaint by the holding companies as to the conditions attached to the German VAT grouping rules.
The AG opined that:
- input tax on capital-raising expenditure incurred by a holding company that manages its subsidiaries has a “direct and immediate” link with the holding company’s economic activity as a whole, and should not be apportioned as the German court suggested. In other words, full input tax recovery should be available to fully-taxable holding companies
- Member states are prevented from excluding entities from VAT groupings for reasons of legal form.
If the AG’s opinion is followed by the ECJ then there will be clear authority that holding companies who actively manage their subsidiaries will be entitled to full recovery of input tax on capital transactions that relate to those subsidiaries. The result will be a confirmation of the VAT-efficiency of a holding company providing management services to subsidiaries, provided that as a practical matter the intention to provide such services for remuneration is crystallised (and documented) prior to acquisition
As noted in our earlier update2 , HMRC’s recently published revised guidance on VAT recovery for holding companies recognised that the outcome of the ECJ decision in Larentia + Minerva and others may necessitate the need to revisit HMRC’s policy. If the ECJ follows the AG’s opinion, HMRC might be expected to amend its guidance further.
Finally, and again provided the AG’s opinion is followed by the ECJ, an amendment to the UK current VAT grouping rules can be expected (as they allow only “bodies corporate” to join a UK VAT group).
The AG’s decision can be viewed here.