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ECJ CASE C-28/26 - RECOVERABILITY OF INPUT VAT OF A HOLDING COMPANY
Case C-28/26 - Examines the right of a holding company to deduct input VAT on services acquired in the interest of its subsidiaries where those services are offered to its subsidiaries with no consideration.
On 12 January 2017, the European Court of Justice delivered its judgment in the case of MVM (C-28/16), concerning the right of MVM to deduct input value added tax (VAT) paid in relation to services procured in the interest of its subsidiaries.
This case re-iterates the principles that need to be considered in order to determine whether the involvement of a holding company, in the management of its subsidiaries, without charging those subsidiaries either for the cost of the services procured in the interest of the group of companies as a whole or in the interest of certain of its subsidiaries, nor for the corresponding VAT, constitutes an ‘economic activity’, within the meaning of the Council Directive 2006/112/EC of 28 November 2006 (EU Principal VAT Directive).
A. Facts of the case
MVM is a Hungarian State-owned commercial company active in the energy sector. It leases power plants and fibre optic networks as well as being the owner of a number of companies which mainly generate or sell electricity.
MVM was responsible for the strategic management of the group (corporate group under Hungarian law, not a VAT Group). For that purpose, it acquired legal, business-management and public-relations services for the benefit of:
- itself, since those services were provided in relation to its leasing of power plants and fibre optic networks, subject, as such, to VAT;
- the entire group; and
- each of the members of the group.
MVM deducted the VAT relating to all of those services. However, even when those services were in the interest of the entire group or related directly to the taxed activities of the other members of the group, MVM did not, save for a few exceptions, charge its subsidiaries for those services.
Nor did MVM impose a general charge on the group for its strategic management, with the result that it carried out that activity free of charge.
During a tax inspection, the Tax Authority of Hungary took the position that VAT relating to the legal, business-management and public-relations services could be deducted only to the extent to which MVM had used those services in order to effect supplies of goods or services.
B. Questions referred to the European Court of Justice (ECJ) by the Supreme Court:
- May a holding company which plays an active role in the management of certain affairs of its subsidiaries, or of the group of companies as a whole, but which does not pass on to its subsidiaries the cost of the services carried out in relation to its active holding activity or the corresponding VAT be regarded as a taxable person for the purpose of VAT in respect of those services?
- If the first question is answered in the affirmative, may the active holding company exercise the right to deduct the VAT corresponding to the services used by it which are directly related to the taxed economic activity of some of its subsidiaries, and if so in what way?
- If the first question is answered in the affirmative, may the active holding company exercise the right to deduct the VAT corresponding to the services used which are in the interest of the group of companies as a whole, and if so in what way?
- Do the answers to be given to the above questions differ if the active holding company bills its subsidiaries in respect of the abovementioned services as intermediary services, and if so to what extent?
C. Judgment of the ECJ
C1. No Remuneration - No Economic Activity
The Court re-iterated that an activity is, as a general rule, categorised as ‘economic’ where it is permanent and is carried out in return for remuneration which is received by the person carrying out the activity, therefore, only services supplied for consideration by a taxable person acting as such are subject to VAT.
The mere involvement of a holding company in the management of its subsidiaries, without carrying out transactions subject to VAT under Article 2 of Directive 2006/112, cannot be regarded as an ‘economic activity’ within the meaning of Article 9(1) of that directive.
In the present case, MVM normally received no remuneration from its subsidiaries in exchange for its centralised management of the activities of the group. Thus, in the light of the foregoing considerations, it must be held that the involvement of MVM in the management of its subsidiaries cannot be regarded as an ‘economic activity’, within the meaning of Article 9(1) of Directive 2006/112, such as to come within the scope of that directive.
It follows that MVM does not have the right to deduct the VAT paid for the services at issue to the extent to which those services relate to transactions falling outside the scope of Directive 2006/112.
C2. Direct and immediate link of the expenses of the company with the taxed activities of the company
Further, the court recalled that in order for VAT to be deductible, the input transactions must have a direct and immediate link with the output transactions giving rise to a right of deduction. Therefore, it is irrelevant if the subsidiaries will use the relevant services for their taxed activities or not.
It is common ground that, during the period at issue in the main proceedings, MVM engaged in a taxable economic activity, namely the leasing of power plants and fibre optic networks. However, it appears difficult to imagine that the services at issue, namely services procured in the interest of other members of the group and business-management services relating mainly to the acquisition of shareholdings, may have a direct and immediate link with that leasing activity, considered overall, although this is a matter for the referring court to determine.
C3. The EU Principal VAT Directive does not provide for the method to be used by Member States for the apportionment of input vat to economic and noneconomic activities.
Following the assessment that certain of the services at issue relate to both economic and non-economic activities of MVM, it should be borne in mind that the provisions of Directive 2006/112 do not include rules relating to the methods or criteria which the Member States are required to apply when adopting provisions permitting the apportionment of input VAT paid according to whether the relevant expenditure relates to economic activities or to noneconomic activities.
In those circumstances, and in order that taxpayers can make the necessary calculations, it is for the Member States to establish methods and criteria appropriate to that objective and consistent with the principles underlying the common system of VAT. In particular, the Member States must exercise their discretion in such a way as to ensure that deduction is made only for that portion of the VAT that is proportional to the amount relating to the transactions giving rise to the right to deduct.
In the case at hand, the Court considers that Articles 2, 9, 26, 167, 168 and 173 of Directive 2006/112 must be interpreted as meaning that, in so far as the involvement of a holding company, such as that at issue in the main proceedings, in the management of its subsidiaries, where it has charged those subsidiaries neither for the cost of the services procured in the interest of the group of companies as a whole or in the interest of certain of its subsidiaries, nor for the corresponding VAT, does not constitute an ‘economic activity’, within the meaning of that directive, such a holding company does not have the right to deduct input VAT paid in respect of those services in so far as those services relate to transactions falling outside the scope of that directive.
Disclaimer: This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case. No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.
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