Indirect Tax Alert | 22 January 2018

Cyprus Tax Authority issues Circular on VAT treatment of active management holding companies

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Executive summary

The Cyprus Tax Department issued an Interpretative Circular, on 9 January 2018, clarifying the value added tax (VAT) technical treatment of active management holding companies, and in particular, the right to deduct management expenses pertaining to subsidiaries.

The Tax Authority, through this Circular, express its position as to when a holding company has the right to recover input VAT, which follows the decisions of the Court of Justice of the European Union in a number of cases, with the most critical ones being the joint cases of Larentia + Minerva and Marenave (C-108/14 and C-109/14) and MVM (C-28/16).

Detailed discussion

Summary of the Circular

The Circular restates the fact that the mere holding of shares for the purpose of receiving dividends in a passive manner is not an economic activity for VAT purposes. Hence, no right for input VAT recovery exists. However, it also provides that economic activity arises in the case of active management where the holding company is involved, directly or indirectly, in the decision-making processes of the subsidiary, such as the provision of management and/or advisory services (under conditions) in exchange for consideration.

The Circular stresses that the extent of ”active” management of the subsidiaries is to be examined on a practical ad hoc basis, with actual indicators including, but not limited to, common directors, board minutes and/or available human and technical resources (even if outsourced), under conditions.

The right to deduct input VAT on expenses is determined by the extent that such expenses relate to the active management and are provided to the subsidiaries in return for consideration. It must be stressed that certain elements of the Circular need clarification as they may conflict with case law. Notwithstanding, the VAT savings opportunity is present and should be carefully considered.

Considerations for businesses

The Circular is a crucial piece of guidance for holding companies with active participation in their subsidiaries’ management. The extent of the input VAT deduction depending on the provision of active management services to subsidiaries for consideration sets an important tax planning criterion for holding companies. Furthermore, this criterion could result in material VAT savings.


Affected entities should consider the following to ensure compliance with VAT obligations and simultaneously enhance the company’s VAT position with respect to active management holding companies, including:

  1. Structure transaction flow for maximum operational and VAT efficiency
  2. Determine the extent of the company’s active involvement in subsidiary management and its impact on its VAT position
  3. Minimize VAT costs through effective application
  4. Liaise with authorities to ensure compliance and security

For additional information with respect to this Alert, please contact the following:

Ernst & Young Cyprus Limited, Nicosia
  • Philippos Raptopoulos, Head of International Tax Services
  • George Liasis, Head of Indirect Tax Services
  • Maria P. Raspa
  • George Pitsillis
  • Simos Simou
  • Elpida Papachristodoulou

EYG no. 00344-181Gbl