VAT and holding companies: involvement in the management of a subsidiary

The ECJ has held that a holding company making taxable supplies of property to a subsidiary is entitled to input VAT credit on costs incurred in acquiring the shareholding in its subsidiary: Marle Participations SARL v Ministre de l’Economie et des Finances (ECJ, 05 July 2018). The ECJ held that the letting of a building by a holding company to its subsidiary amounts to “involvement in the management” of that subsidiary and sufficient to amount to an economic activity giving rise to a right to deduct input VAT on expenditure incurred in acquiring shares in that subsidiary.

Background

Marle Participations (MP) is the holding company of a manufacturing group. In 2009, MP carried out a restructuring operation which lead to sales and acquisitions of securities. It sought to deduct the input VAT on that restructuring in full. The French tax authorities denied MP a deduction on the basis that the expenditure contributed to the implementation of capital transactions falling outside the scope of the right to deduct. MP appealed arguing that it was entitled to input VAT credit on that expenditure as a holding company involved in the management of its subsidiaries. The French Courts decided to refer to the ECJ the question whether the letting of a building by a holding company to a subsidiary constitutes involvement in the management of that subsidiary so as to give rise to a right to deduct.

Input VAT deduction

The ECJ noted that it was settled law that, whilst the mere acquisition and holding of shares in a company is not to be regarded as an economic activity, the position is different where the holding is accompanied by direct or indirect involvement in the management of the companies in which the interests are held, through the carrying out of transactions subject to VAT, such as the supply to those companies of financial, commercial and technical services. In this case, it was accepted that the only activities carried out by the holding company was the letting of property to the subsidiaries.

Earlier caselaw of the court had held that the involvement of a holding company in the management of companies in which it has acquired a shareholding constitutes an economic activity where it involves carrying out transactions which are subject to VAT, such as the supply of administrative, accounting, financial, commercial, information technology and technical services. However, the court held that the term "involvement of a holding company in the management of its subsidiary" covers all transactions constituting an economic activity performed by the holding company for the benefit of its subsidiary. Therefore, the letting of a building by a holding company to its subsidiary amounts to involvement in the management of that subsidiary, giving rise to an economic activity and the right to deduct the VAT on the expenditure incurred by the company for the purpose of acquiring securities of that subsidiary, “on condition that that supply of services is made on a continuing basis, that it is carried out for consideration and that it is taxed, meaning that the letting is not exempt”.

Where these conditions are met, the expenditure must be regarded “as belonging to its general expenditure and the VAT paid on that expenditure must, in principle, be deducted in full”, unless certain output economic transactions are exempt from tax. Where, however, the expenditure is incurred in connection with the acquisition of shareholdings in several subsidiaries and the holding company only involves itself in the management of some, but not all, of those subsidiaries, then the ECJ held that the expenditure must be regarded as only partially belonging to general expenditure. VAT paid on that expenditure may be deducted only in proportion to the expenditure “which is inherent in the economic activity, in accordance with the apportionment criteria defined by the Member States, which, when exercising that power, must have regard to the aims and broad logic of the VAT Directive and, on that basis, provide for a method of calculation which objectively reflects the part of the input expenditure actually to be attributed, respectively, to economic and to non-economic activity, which it is for the national courts to ascertain”.

Comment

The decision extends the range of supplies that a holding company may make to its subsidiary and which may give rise to an input VAT credit on the acquisition of that holding. Decisions to this point had concentrated on more obviously management-like activities, but this case confirms that simply providing the subsidiary with a taxable supply of property would be sufficient to engage the court’s existing case law on input VAT recovery. On this basis, there seems little reason to consider that other forms of supply from the holding company to a subsidiary would not equally give rise to a right to deduct the input VAT incurred on acquisition, provided that such supplies are genuine commercial activities and provided on an ongoing basis.