It is not unusual for a holding company to incur costs that are (partly) used for the activities of subsidiaries. But what if a holding company that qualifies as a VAT entrepreneur purchases services from third parties and contributes these services to the capital of a subsidiary? Is the holding company entitled to deduct input VAT incurred on the services acquired? The Court of Justice of the European Union (CJEU) ruled on 8 September in the W-GmbH case that a holding company is not entitled to a VAT deduction for services it purchased from third parties and contributed to subsidiaries. The court upheld the opinion of Advocate General Pitruzzella issued on 2 March 2022 (click here for our analysis of the AG’s opinion).
Facts
W-GmbH is a holding company that holds shares in two limited partnerships that are primarily engaged in the development of real estate. For the most part, the limited partnerships carry out services that are exempt from VAT, as a result of which they have little or no right to deduct VAT on costs they incur. A decision was made to raise capital for new projects, so W-GmbH contributed services worth EUR 9.4 million and EUR 30.26 million to the two companies, respectively, which it purchased from a third party. At the time it was decided that W-GmbH would contribute the services, an agreement was concluded for W-GmbH to provide administrative and management services to the subsidiaries for a fee. By doing so, W-GmbH qualified as a VAT entrepreneur. The administrative and management services are subject to VAT, giving W-GmbH the right to deduct VAT. W-GmbH fully deducted the VAT incurred on the purchased services that it contributed to the subsidiaries.
Decision of the CJEU
The CJEU agreed with the AG in concluding that W-GmbH is not entitled to a VAT deduction. The actual use of the purchased services is decisive and there must be a link between the transactions and the economic activities of the supplier. In this case, the costs are neither used for W-GmbH’s management service, nor for its economic activities in general. Therefore, there is no direct and immediate link between the costs and W-GmbH’s activities. On the contrary, the costs are used for the largely exempted activities of the subsidiaries. The contribution in-kind itself does not give rise to a right to deduction; according to the CJEU, the contribution in kind is comparable to merely holding shares, which is not an economic activity for VAT purposes.
Practical importance
As a result of the CJEU’s decision in the W-GmbH case, tax authorities throughout the EU are likely to be more alert to situations in which holding companies incur costs that are (partly) used by a subsidiary. Potentially affected companies should therefore consider the following action steps:
- Ensure that the holding company is a VAT entrepreneur, which would be the case if the holding company permanently provides services in exchange for a fee to its subsidiary. The type of services is irrelevant, but the services must be provided to each subsidiary. If this is not the case, there is only partial VAT entrepreneurship and therefore only a partial right to a deduction.
- If VAT is deducted on costs incurred, there must be a sufficient direct and immediate link between those costs and the holding company’s activity that consists of acquiring, holding and selling shares, and it also should be possible to demonstrate this link in the company’s accounts and/or other documents.
- Describe precisely in the articles of association and in the agreements with a subsidiary which activities the holding company carries out (on behalf of the subsidiaries) and carefully monitor whether the holding company's activities correspond to what is included in the articles of association and/or agreements and make any changes, as needed. If you are supervising a sale of shares by one of your subsidiaries as a holding company, ensure that there are specific written instructions by the subsidiary to the effect.
- If costs are being passed on, ensure that there is an agreement on the basis of which the holding company purchases certain goods or services for the subsidiary.
Do not deduct VAT if the costs incurred belong to the subsidiary rather than the holding company, and ensure the invoice is issued in the name of the party for whom the costs are intended so that this party can deduct the VAT on the basis of its own rights. In the case of services, the recipient is the person with whom the service provider has an agreement, so it is important that there is an agreement between the service provider and the party for whom the costs are intended. It would not be a problem in this situation if the holding company pays the invoice or that the invoice is sent to the holding company's address as long as the name on the invoice and the party in the agreement concerns the party for whom the purchased goods and services are intended. It also is possible for a contract to be concluded with the holding company so that it acts as an intermediary between the supplier and the ultimate recipient.
More information?
If you have any questions or would like to assess the implications of the decision for your situation, please contact one of our advisors. We would be happy to assist you!