On 16 July 2015, the CJEU released its decision in the joined cases of Larentia + Minerva mbH & Co. KG and Marenave Schiffahrts AG. The CJEU followed Advocate General (AG) Mengozzi’s earlier opinion and held that active holding companies should have the right to fully reclaim input tax incurred in relation to the acquisition of shares in subsidiaries.
Larentia + Minerva owned 98% of the shares in two limited partnerships each one operating a vessel. It acted as a management holding company for those subsidiaries provided taxable supplies for remuneration. Larentia + Minerva sought to recover input VAT incurred in procuring capital from a third party which was used to fund the acquisition of its shareholdings in the subsidiaries and its services.
Following a similar factual pattern, Marenave incurred input VAT on costs relating to raising capital through the issue of new shares. The capital raised was used to fund the acquisition of shares in four limited shipping partnerships to which Marenave provided management services for remuneration.
The issue was the extent to which deductions were allowed, in relation to input tax incurred on acquisition and issue costs. The German tax authorities only permitted Larentia + Minerva partial deductions and denied Marenave the right to deduct in full.
Questions were referred to the CJEU. Clarification was sought as to the method of calculating the input VAT deduction and, the scope of “VAT group”, within Article 4(4) of the Sixth Directive, and whether this included a partnership.
On 26 March 2015, AG Mengozzi delivered his opinion and considered that fully-taxable holding companies should enjoy complete input tax recovery. He also suggested that VAT grouping rules excluding entities due to legal form, or requiring control and subordination, contravene EU law.
The CJEU’s decision
The CJEU followed AG Mengozzi’s opinion and confirmed that companies whose “economic activity” consisted in the active management of subsidiary companies were entitled to deduct input VAT on fees incurred with the acquisition of subsidiaries, as part of the general “overhead” costs of this activity.
In reaching its conclusion, the CJEU considered whether the holding of shares was an economic activity and drew a distinction based on whether a holding company was involved in the management of all (ie active holding), or only some of its subsidiaries through the provision of taxable services to them. They held that only an active holding constitutes an economic activity.
In this case, it was apparent from the information provided by the referring court that, in the main proceedings, the holding companies were subject to VAT in respect of their economic activity which consisted of supplies they provided for remuneration to their subsidiaries. The VAT incurred on that expenditure was therefore fully deductible.
The CJEU considered that deduction of VAT will only be limited to the extent that costs were attributable to other subsidiaries in whose management the holding company played no part. In those circumstances it would be necessary to apportion the input VAT between the economic and non-economic activities of the holding company.
Finally, in response to the second question, the CJEU confirmed that Article 4(4) of the Sixth Directive, precludes Member States from restricting entities which do not have a legal personality from the formation of a “VAT group” unless such restrictions are necessary and appropriate to prevent abusive practices or combat tax evasion or tax avoidance.
The CJEU’s decision confirms the VAT deduction right of holding companies and we expect that HMRC will in due course provide its response to the judgment. It is likely that other EU Member States will also revise their current practice.
The CJEU affirmed the AG’s opinion regarding the formation of a VAT group. This is an interesting development, particularly given that membership of a UK VAT group is restricted to corporate bodies. It remains to be seen how HMRC will respond to this aspect of the judgment.
In the light of this decision, businesses with holding companies within the EU should review their corporate structure and, in particular, consider whether they have been prevented from recovering input VAT in the past.
The CJEU’s decision can be read here.