Deduction of VAT by a holding company that provides financial, advisory and management services to its subsidiaries
The General Tax Directorate (DGT) establishes guidelines, through binding tax ruling of December 30th, for the deductibility of VAT borne by a holding company that provides services to its subsidiaries.
It is a controversial for long, resolved on many occasions by the Court of Justice of the European Union (ECJ), but that may result in different situations of deductibility as regard VAT. In this sense, the first aspect which should be assessed in this case is if we are talking about what is known as a “pure holding”, i.e. mere holding of shares, or a “mixed holding”, i.e which is involved in the management of such participations.
Firstly, the concept that the Spanish VAT Law, in line with the European Directive, sets for entrepreneur or professional is the one involved in the “management on their own of production factors, material and human, or of one of them, in order to intervene in the production or distribution of goods or services”. The jurisprudence of the European Court of justice clarifies this concept through multiple rulings (Polysar Investments, Harnas & Helm, Cibo Participations) in the case of holding companies, where it establishes that the mere disposal of shares should not be considered as an economic activity, which not constitute the exploitation of an asset in order to obtain income continued over time, which is different from when this involvement entails the intervention, directly or indirectly, in the management of the companies over which it participates. Basically this is because the management of the companies normally entails the provision of administrative, financial, commercial and technical services to its affiliates, these being services subject to VAT. Following this approach, the Court considers that there is a direct or indirect intervention according to a series of criteria:
- To provide services, not enough with being the shareholder who decides who are directors or managers.
- Dividends cannot be deemed as consideration of these services.
- It must be attended to the true nature of services.
- The business assets should be used in this provision.
In summary, a holding will be considered as entrepreneur or professional when it makes a supply of services for its subsidiaries of an economic nature.
Separate question deserves the matter of deduction of VAT by this entity. Thus, again, according to the criteria maintained by the European Court of Justice, the right to deduct VAT presupposes that expenses incurred for its acquisition or production must have formed part of the constituent elements of the price of the operations carried out and giving the right to deduct. The costs of these services form part of the overheads of the taxable person and therefore are an integral part of the price of a company’s products.
In this case, the consultant company charges to its subsidiaries all costs incurred in its management, on the basis of an agreed valuation of these services with the tax authorities, which lead to the fact that its activity is subject to VAT, and therefore may deduct VAT.
Finally, in relation to the financial activity that also provides to its affiliates, the consultant asks whether it should be included or not in the pro-rata of their activity. We must remember that although exempt financial operations do limit the right to deduct, those which are deemed as not usual in the business activity of the taxable person should be excluded from the calculation of the pro-rata.
In this regard, based their judgment on the case-law of the European Court of Justice, the Tax Authorities use the classification of the financial operations as accessory or not to determine its treatment for the purpose of the pro-rata. Although it sets for the circumstances of each case in order to qualify ancillary operations, these transactions must meet two cumulative requirements:
a) Existence of relationship with the main activity.
b) These operations must not be more important than the main activity.
In the present case the Tax Authorities conclude that they are ancillary operations since the work of management of subsidiaries, which is its main activity, is normally also performed through the granting of loans and guarantees for the activity.
Attached is a copy in Spanish of the binding tax ruling number V4169/15.