On 8 September 2022, the Court of Justice of the European Union (the “ECJ”) issued a judgment in case C-98/21 concerning the right to deduct input VAT for a holding company making shareholder contributions-in-kind, by providing services to the benefit of its subsidiaries.
Facts of the case
The facts of the case involved an active holding company, which held shares in two subsidiaries and provided accounting and management services to the latter.
The parent company agreed to make shareholder contributions in kind to both of its subsidiaries by supplying, free of charge, architectural services, static calculation services, planning services for heat and sound isolation as well as other services relating to properties to be built by its subsidiaries. The holding company partly provided these services by procuring goods and services from third party undertakings. It incurred input VAT on these acquisitions, the deduction of which was refused by the German tax authorities. The dispute was brought to the Federal Finance Court (Bundesfinanzhof), which referred to the ECJ for a preliminary ruling.
The ECJ’s decision
The ECJ recalled that input VAT deduction in principle requires the existence of a direct and immediate link between a particular input transaction and a particular output transaction giving rise to the right to deduct. A taxable person however also has a right to deduct even where there is no direct and immediate link between a particular input transaction and an output transaction or transactions giving rise to the right to deduct where the costs of the services in question are part of his or her general costs. According to the ECJ, in either case, it is necessary that the cost of the input goods or services be incorporated either in the cost of particular output transactions or in the cost of goods or services supplied by the taxable person as part of his or her economic activities.
On the basis of these principles, the ECJ examined the actual use of the goods and services at stake and found that the latter were not used by the holding company to be able to offer the accounting and management services, provided to its subsidiaries. The expenditure incurred by the holding company can thus not, according to the ECJ, be regarded as being part of the components of the price of its taxed output services giving rise to a right to deduct.
The ECJ subsequently turned to the question as to whether the input goods and services could be considered as being part of the general costs of the holding company, such that they constitute components of the price of the goods or services which it supplies and therefore have a direct and immediate link with its economic activity as a whole. Since these goods and services have been the object of the holding company’s shareholder contributions to its subsidiaries, the ECJ concluded that they were to be considered as related to the holding of shares, which does not amount to an economic activity within the meaning of the VAT Directive and therefore does not give rise to a right to deduct input VAT. The ECJ in particular emphasised that the goods and services acquired had been transferred free of charge to the subsidiaries in the context of the holding company’s shareholder contributions and that, therefore, the costs cannot be part, as general costs, of the components of the holding company’s economic activity (consisting in providing management and accounting services).