On 15 September 2015, the Supreme Administrative Court of Finland issued two decisions concerning the right of a holding company belonging to a group of companies that carries out VAT-liable activities to deduct the value added tax included in the expenses related to the purchase of shares.
The decisions finally provide some clarification of the deductibility of expenses incurred from the purchase of subsidiaries. However, they still leave open the question of how soon after purchasing a subsidiary the parent company must be able to start providing services to it in order to not lose the deduction right.
No Deduction of VAT When Acquiring Company Not Carrying Out VAT-Liable Activities
Decision KHO:2015:135 concerned the year 2011, when the holding company of a group had acquired the shares of a Swedish company. In 2011, the holding company had no employees and it had not sold any services to any of its subsidiaries. The holding company's only activities that fell within the scope of VAT consisted of a loan granted to the subsidiary, which yielded VAT-exempted interest income to the holding company.
In this respect, the holding company could not be considered to be a taxable entity referred to in the Value Added Tax Act or the VAT Directive. As the share purchase had taken place at a time when the holding company itself did not engage in any VAT-liable activities, it could not deduct the VAT related to the purchase of the shares. It was considered to be irrelevant that the parent company started to sell VAT-liable services to the subsidiary in question a year later.
VAT Is Deductible When Acquiring Company Carries Out VAT-Deductible Activities
Decision KHO:2015:134, on the other hand, concerned the year 2012, when the same holding company had acquired the shares of a British company. In 2012, the holding company held the off-the-shelf software licences used by all the companies in its group. Employees in charge of the group's IT functions had been transferred to the holding company. Their duties included the decision-making, resourcing and coordinating related to the group's information systems, software and hardware.
The holding company invoiced the parent company for its services, and the parent company, in turn, invoiced the holding company's subsidiaries for the services together with other group-level charges. As the holding company provided services to its subsidiaries in exchange for payment, it was a taxable entity as referred to in the Value Added Tax Act and the VAT Directive 2006/112/EC.
Expenses related to the purchase of shares were the holding company's general expenses with a direct link to all of the holding company's economic activities. As all the economic activities carried out by the holding company were VAT-deductible activities and in no part were activities not entitling to VAT deduction, the holding company had the right to deduct the VAT included in the price of the services related to the purchase of the shares of a new subsidiary in its entirety.
Decisions of the Supreme Administrative Court in Line with CJEU Case-Law
In its case-law (e.g. joined cases C-108/14 and C-109/14, Beteiligungsgesellschaft Larentia + Minerva mbH & Co. KG and Marenave Schiffahrts and the case-law cited), the Court of Justice of the European Union has specified the criteria according to which an activity is deemed to be such involvement in the management of a subsidiary or an affiliate that leads to the holding company be considered to be engaged economic activities.
The involvement of a holding company in the management of a subsidiary results in tax liability when it entails carrying out transactions which are subject to VAT, such as the supply by a holding company to its subsidiaries of administrative, financial, commercial and technical services.
In this respect, the decisions of the Supreme Administrative Court abide by CJEU case-law, as it was considered that in 2011, the holding company did not yet carry out VAT-liable economic activities, whereas the company's activities that commenced in 2012 were deemed to be VAT-liable.
Rulings Appear Contradictory and Leave Open Questions
Decision KHO:2015:135 appears to be contrary to established practice, because when assessing the deductibility for the year 2011, no relevance was given to the fact that the company did begin to carry out VAT-liable activities and started to invoice its services to the subsidiaries in 2012. The Supreme Administrative Court did not provide its reasoning for this view.
Similarly, the decision issued by the Tax Office for Major Corporations, and upheld by the Supreme Administrative Court quite simply states that the purchases related to the acquisition of subsidiary were not connected to the planned future VAT-liable activities in such a way as to entail their deductibility as expenses incurred in preparation for business activities.
It is not evident from the decision why the purchase of a subsidiary in 2011 was not considered to be linked to the holding company's planned future business activities. The result appears contradictory considering that decision KHO:2015:134 considered that the purchase of a subsidiary in 2012 had a direct link to an economic activity that commenced in 2012.
Decision KHO:2015:135 also leaves open the question of whether the result would have been different if personnel had been transferred or if expenses that would be considered to be expenses incurred in preparation for business activities had otherwise been incurred already in 2011.