In the two joined cases of Beteiligungsgesellschaft Larentia + Minerva mbH & Co KG v Finanzamt Nordenham9 and Finanzamt Hamburg-Mitte v Marenave Schiffahrts AG110, Advocate General Mengozzi (the AG) has handed down an opinion on questions referred to the Court of Justice of the European Union (CJEU) by Germany regarding the VAT deduction of holding companies and VAT grouping rules.

In the opinion of the AG, VAT on expenditure by a holding company on raising capital has a direct and immediate link with its economic activity as a whole if it actively manages its subsidiaries. The input tax is not to be apportioned between economic and non-economic activities. Therefore, fully-taxable holding companies should enjoy complete input tax recovery. The AG also suggested that VAT grouping rules excluding entities due to legal form, or requiring control and subordination, contravene EU law.


In the first case, the holding company held 98% of the shares in two subsidiaries, which were limited partnerships. The holding company provided administrative and business services to its subsidiaries for remuneration. The holding company sought to deduct in full the input tax that it incurred in raising capital from a third party to fund the acquisition of those subsidiaries and its services. However, the German authorities only partly allowed the input tax deductions, considering the majority of the input tax to be attributable to the non-economic part of the company’s activities, namely, the holding of shares. The German court of first instance dismissed the company’s challenge and the company appealed.

In the second case, the holding company increased its capital, incurring input tax on the costs of issue. It then acquired shares in four limited partnerships to which the company provided business management services for remuneration. The company sought to deduct the input tax on the costs of issue from its output tax on its services to the subsidiaries. The German fiscal authority disallowed the input tax deductions on the basis that the company was not involved in managing the subsidiaries. The company succeeded in its appeal before the German court of first instance and the German fiscal authority appealed.

The German appellate court considered that the services provided to both companies were used for both economic activities and non-economic activities and took the view that input tax recovery was therefore to be limited. However, the appellate court referred to the CJEU the question of apportionment and questions regarding the legitimacy of the German VAT grouping rules.

AG’s opinion

There are three main elements in the AG’s opinion:

  • expenditure connected with capital transactions incurred by a holding company that involves itself in the management of its subsidiaries, has a direct and immediate link with that holding company’s economic activity as a whole. Input tax on that expenditure should not, therefore, be apportioned between the economic and non-economic activities of the holding company
  • the second subparagraph of Article 4(4), Sixth Council Directive 77/388/EEC, on the harmonisation of the laws of the member states relating to turnover taxes11, precludes a member state from making the formation of a VAT group subject to all members of that group having legal personality, unless that condition is justified in order to prevent abusive practices or tax evasion or avoidance. Domestic legislation requiring a relationship of control and subordination between the members of the VAT group may be compatible with Article 4(4) provided that it is a necessary and proportionate measure to prevent abusive practices and tax evasion or avoidance
  • a taxable person cannot rely directly on the second subparagraph of Article 4(4). However, domestic courts must, so far as possible, interpret their national legislation in conformity with that Article.


Many EU member states have sought to prevent holding companies from recovering VAT incurred on services (such as due diligence and legal fees) they receive in acquiring other companies. The AG’s opinion supports holding companies’ right to reclaim VAT when the holding company manages, directly or indirectly, companies they have acquired.

Holding companies which have been denied VAT recovery on these types of services under existing national rules should consider protective claims pending the CJEU’s judgment.

To read the opinion click here.