The CJEU has once again had to consider a holding company’s right to deduct VAT. In a case to which the Sixth VAT Directive – as opposed to the more recent VAT Directive – was relevant, the referring German court was in doubt about how to apportion input VAT paid by a holding company for the acquisition of capital intended for the purchase of shares between the economic and non-economic activities of that company. First of all, the Court recalled the principles arising from its case-law on this topic, namely:
(1) A holding company whose sole purpose is to acquire shares in other undertakings and which does not involve itself directly or indirectly in the management of those undertakings, without prejudice to its rights as a shareholder, does not have either the status of taxable person or the right to deduct tax.
(2) The mere acquisition and holding of shares in a company is not to be regarded as an economic activity conferring on the holder the status of a taxable person. The mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefore on a continuing basis because any dividend yielded by that holding is merely the result of ownership of the property.
(3) However, it is otherwise where the holding is accompanied by direct or indirect involvement in the management of the companies in which the holding has been acquired and the involvement of a holding company in the management of companies in which it has acquired a shareholding constitutes an economic activity where it entails carrying out transactions which are subject to VAT, e.g. the supply of administrative, financial, commercial and technical services.
The right to deduct input tax arises even where there is no direct and immediate link between a particular input transaction and output transactions giving rise to the right to deduct, where the costs of the services in question are part of a taxable person’s general costs and are, as such, cost components of the taxable person’s supplies. The rules in Article 17(5) of the Sixth Directive provide for methods of deduction where input transactions are used to carry out both economic transactions which give rise to a right to deduct and those which do not. However, the determination of the methods and criteria for apportioning input tax between economic and non-economic activities – referred to in the UK as business and non-business activities – is in the discretion of the Member States who must, within that discretion, provide for a method of calculation which objectively reflects the part of the input expenditure actually to be attributed to those two types of activity. It was for the national courts to establish whether the Member State had had regard to the aims and broad logic of the Sixth Directive and had provided for such a method of calculation.
The CJEU also found that the Sixth VAT Directive precluded national legislation which reserved the right to form a VAT group solely to entities with legal personality and linked to the controlling company of that group in a relationship of subordination, except where those requirements were “appropriate and necessary in order to achieve the objectives seeking to prevent abusive practices or behaviour or to combat tax evasion or tax avoidance”, which were matters for the national court to determine. However, the relevant provision, Article 4(4) did not satisfy the criteria allowing taxable persons to claim direct effect (i.e., to claim the benefit of the provision in the event that their Member State’s legislation was not compatible with that provision and could not be interpreted in a way compatible with it).
