ECJ’s judgment of July 16th, 2015. Larentia and Minerva. VAT deduction by holding companies and single VAT taxpayer
The judgment brings up an issue that has been recurrent in recent years, regarding the possibility of holding companies to deduct VAT or not, given that they are not considered taxable persons by not carrying out a business or professional activity.
In this regard, it should be recalled that under current case-law and legislation, those holding companies that do not perform any economic activity, but merely holding the shares of its subsidiaries are not considered as entrepreneurs or professionals for VAT, excluding thus any possibility to deduct the amount of input VAT. In particular, for the purposes of Spanish legislation, through the VAT Law 37/1992 is mentioned in Article 5.One.b) that commercial companies are deemed as entrepreneurs or professionals deemed, unless proven otherwise. This safeguard was introduced in the regulatory text following the Community case-law that excluded purely holding companies of the taxable person’s category.
However, the decision of the ECJ in the Judgment of July 16, sheds some light on the controversial issue, allowing the deduction for holding companies that besides participating in its subsidiaries, provides them with a service.
This case refers to two entities that form a VAT, where the parent company, besides owning the shares of its subsidiaries, provides them with administrative and commercial services for consideration. These parent companies deducted the VAT on the acquisition of capital used to finance the participation in its subsidiaries and for performance of services, as well as the VAT borne in the costs for a capital increase that would subsequently be used to acquire the shares of the subsidiaries. The Tax Administration understands that it cannot be deducted the VAT relating to the financing for the participation of subsidiaries, since not being an economic activity the mere holding of shares and, in consequence, asks the Court which method to follow for partial deduction, that is, the pro-rata.
However, the Court points out, first, that the situation is different when holding companies, while maintaining the units, do perform an activity of management of its subsidiaries, in which case it carried out an economic activity and, therefore, are deemed as entrepreneurs or professionals entitled to deduct VAT. Secondly, the Court also mentions that “However, a taxable person also has a right to deduct even where there is no direct and immediate link between a particular input transaction and an output transaction or transactions giving rise to the right to deduct, where the costs of the services in question are part of his general costs and are, as such, components of the price of the goods or services which he supplies. Such costs do have a direct and immediate link with the taxable person’s economic activity as a whole”
Therefore, the Court considers that the holding companies that carry out an activity or business management in respect of its subsidiaries, may deduct VAT on the purchase of goods and services which form part of the general costs of them, to the extent that it can be understood to incorporate these costs onto the price of rendered services, directly or indirectly. So, it does not limit the deduction of the input VAT only on goods and services directly related to the activity supplied to its subsidiaries, but the deduction for these companies is extended to the overall costs. In any case, the Court clarifies that this deduction is permissible only to the extend of services provided to its subsidiaries, so cannot deduct the VAT on those costs related to subsidiaries to whom services are not supplied to.
The Court also raises the question of the possibility that they may be part of a VAT group other entities that are not legal entities. On this issue, the Court answered that the EU Directive has not excluded this possibility, so that the requirements stated by the European legislation refers to the existence of a relationship of subordination, but in no case should is limmited to only entities with legal personality. Consequently, the Court left open the possibility that an entity without legal personality can be part of a group of companies for the purposes of VAT, except in those cases to be excluded on grounds of fraud prevention.
A copy of the judgment of accumulated cases C-108/14 and C-109/14 is attached.