The right (or not) for holding companies to deduct VAT is a heated topic at European level. Disputes are currently being clarified by the European Court of Justice, with implications for companies at European level, including in Luxembourg. Jacques Verschaffel and Michal Ulicny from EY Luxembourg share their analysis.
It is not unusual that VAT authorities challenge input VAT recovery of holding companies, including when these holding companies have additional activities exceeding the sole holding of shares in their subsidiaries.
Recently, a new referral (C-98/21) to the Court of Justice of the European Union (CJEU) has been asking whether a mixed holding company that supplies taxable services to its subsidiaries is allowed to deduct input VAT on purchases it received which, however, were linked to the activities of the subsidiaries. On 3 March 2022, the opinion of Advocate General (AG) on the question has been published.
Jacques Verschaffel, Associate Partner, Indirect Tax at EY Luxembourg, comments: “In most cases, holding companies have no or a limited right to deduct input VAT. As such, Luxembourgish entities are often impacted by a VAT charge, which represents a cost. If the Court follows the AG’s opinion, this would be the confirmation that holding companies need to carefully analyze and anticipate the VAT impact of the costs incurred.
Summarizing the case
A German holding company active in the construction field, W-GmbH, is engaged in the management of its subsidiaries. As part of its shareholder contribution, W-GmbH rendered certain services free of charge (architectural services, static calculations, planning) to two of its subsidiaries. The holding company provided also other administrative services to both subsidiaries, such as accounting and management services, for which a fee was charged.
In its 2013 VAT returns, W-GmbH applied a full deduction of VAT paid on its input transactions, including VAT on the costs incurred on services which were provided free of charge. However, following a tax audit, this was challenged by the German tax authority who took the view that the services representing the “shareholder contribution” were not attributable to W-GmbH 's commercial activity. Therefore, the amounts of input VAT paid in respect of those purchases could not be deductible.
Analysis of the preliminary decision
In line with constant case laws of the CJEU, the AG opined that in order to benefit from a right to deduct input VAT, it is necessary that there is a direct and immediate link between a particular input transaction and one or more output transactions giving rise to the right to deduct.
However, the input VAT on services received by W-GmbH and which were contributed to its subsidiaries cannot be deductible, since they are linked to an activity which is not of an economic nature (i.e. holding of participations). Moreover, the input transactions had a direct and immediate link with the VAT exempt activities (sale of residential housing) carried out by the subsidiaries.
Consequently, according to the AG, the respective expenditures do not have a direct and immediate link with its commercial activity.
Michal Ulicny, Senior Manager, Indirect Tax at EY Luxembourg, says: “While awaiting the final decision of the CJEU, and especially to see if it follows the AG’s opinion, this case is another example underlining the importance for Luxembourg holding companies of considering the nature of transactions, including when released with their subsidiaries, when determining the input VAT recovery. Based on our experience in the area of indirect tax, we will be helping our clients to navigate the changes that might be brought by this eagerly awaited decision.”