Deduction of VAT for active holding company

Gladys Cristiaensen   |  

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During a VAT audit, the VAT authorities have often raised a controversial issue in recent months, namely the correct VAT treatment of holding companies. Discussions mainly relate to the right to deduct VAT paid by (active) holding companies.

On 8 September 2022, the Court of Justice issued a judgment in the W GmbH case (C-98/21). In this case, the right to deduct VAT is central to an active holding company which provides services subject to VAT and also purchases services which it subsequently transfers to its two subsidiaries. The Court ruled that in this particular situation there is no right to deduction for costs directly attributable to the transfer. The Court seems to take account of the VAT situation of subsidiaries which are virtually not entitled to deduct VAT. Conclusion? An active holding company may deduct VAT only to the extent that it relates to its own economic activities (subject to VAT).

The fact that a holding company is ‘active’ therefore does not necessarily mean that the right to deduction for all costs incurred by this holding company is guaranteed. In the case of a VAT audit, for example, the holding company must prove that it is effectively providing services that are subject to VAT, or that it intends to do so in the future. Also consider the high transaction costs for M&A projects that may not be deductible. Holdings that carry out financing activities must also ensure that this will not have an impact on the right to deduct VAT.

It is therefore important to re-examine the VAT status of active holding companies.

Fixed establishment for VAT: the saga continues…

The fixed establishment (“FE”) plays a crucial role in the VAT system. On the basis of this concept, it is determined whether a company is required to pay VAT from that FE, or whether it is liable to pay VAT for the purchase of services.

In a Regulation of 2011, which is directly applicable in all Member States, the Council developed a definition. It must be an establishment characterised by a sufficient degree of durability and a suitable structure, in terms of staff and technical resources, to provide or purchase services. Despite this definition, we see in practice that the interpretation of the concept regularly leads to disputes with (foreign) VAT authorities.

The Court of Justice (“Court”) has issued a judgment in a number of recent cases on the concept of FE.

In the Dong Yang case (C-547/18, 7 May 2020), the Court held that a subsidiary does not automatically constitute a fixed establishment of its parent company, as was assumed in a number of Member States. Whether the subsidiary constitutes a FE depends on whether the material conditions are satisfied.

In the Titanium Ltd. case (C-931/19, 3 June 2021), the Court considered that the letting of own immovable property in another Member State, in which the owner does not have his own staff, cannot lead to the holding of a FE.

In the most recent case, Berlin Chemie (C-333/20, 7 April 2022), the Court held that a subsidiary cannot simply be regarded as a fixed establishment of the parent company, even if that subsidiary is under its control. After all, the resources of a subsidiary cannot be a fixed establishment and at the same time be used to provide services with regard to that fixed establishment. However, the Court still leaves an opening, allowing uncertainty about the concept to persist.

The advice of our BOFIDI experts

Based on these judgments, it is our opinion that the Court is right to interpret the concept of FE strictly. However, foreign tax authorities and the Belgian VAT authorities often still use a (too) broad interpretation of the term FE. We therefore recommend checking whether subsidiaries established in another Member State and providing services (exclusively) to the parent company, or if a company has stock in another Member State, or even if a company has technical resources and staff in another Member State, etc., are not deemed to have a fixed establishment in that Member State.

Our Bofidi experts will be happy to help you

Do you have any specific questions on this subject? Then please do not hesitate to contact us. Bofidi’s team of experts will be happy to help you.