The opinion of the Advocate General (“AG”) of the European Court of Justice (“ECJ”), Juliane Kokott, published on 14 May 2020 in case C-42/19, concerns a Portuguese holding company called Sonaecom, which invests in companies active in the telecommunications market and also provides services subject to VAT to those subsidiaries.
In 2005, Sonaecom ordered a market study for the acquisition of shares in a company called Cabovisao. In addition, Sonaecom hired a bank to assist it in issuing bonds to raise the necessary capital for the acquisition of Cabovisao. As Sonaecom's intention was to provide services to Cabovisao, Sonaecom deducted input VAT paid on the aforementioned services. In spite of this, the acquisition failed so that no services were eventually provided by Sonaecom to Cabovisao. The unused funds from the bond issuance were made available to Sonaecom's parent company in the form of a loan. The Portuguese authorities considered that Sonaecom was not entitled to deduct the VAT and requested a reimbursement.
In her opinion, AG Kokott firstly recalls that a holding company which supplies services subject to VAT to its subsidiaries is considered a taxable person with a right to deduct input tax in relation with these services. This right of deduction extends to VAT paid in preparation for the provision of services and remains acquired even if the envisaged provision of service will not take place.
With respect to the market study, AG Kokott considered it to be an expense directly related to the acquisition of Cabovisao and the subsequent envisaged provision of services. She considered that even though a disproportion between the scope of the deduction and the tax liability might exist, no limitation on the right of deduction is necessary. In her view, VAT paid on expenditure for the acquisition of a shareholding should be fully deductible because of the link with the services envisaged and not because it is considered as general overhead which was recognised by traditional case-law. She also seems to be in favour of an approach which considers that a dominant holding company could be seen as indirectly exercising the economic activity of its subsidiary so as to give rise directly to a right of deduction at the level of the holding company even in the absence of provision of services to the subsidiary.
With respect to VAT paid for the bond issuance, the AG considers that it will be necessary to look at the actual use of the funds, which prevails over a divergent initial intention. As the funds, which were originally intended to be used for an activity that gives a right to deduct, are ultimately used for an activity that does not give such right, a deduction should be denied.
Given the significance of VAT deductions for holding companies, it will be interesting to see to what extent the ECJ will follow the AG’s opinion.