On July 5th 2018, the Court of Justice of the European Union (the “ECJ”) handed down an important ruling, clarifying that the letting of a building, by a holding company to its subsidiary, amounts to ‘involvement in the management’ of that subsidiary, which must be considered to be an economic activity, within the meaning of the Council Directive 2006/112/EC of November 28th 2006 on the common system of value added tax (the “VAT Directive”).
In the case at hand, a French limited liability company, Marle Participations S.à r.l., acquired and sold shares in the context of a group restructuring and deducted in full the VAT charged on various expenditures relating to said operations. The French tax authorities however denied the deduction on the ground that the expenditures contributed to the implementation of capital transactions which fall outside the scope of the right of input VAT deduction.
The ECJ recalled that, while the mere acquisition and holding of shares in a subsidiary is not to be regarded as an economic activity conferring on the holder the status of a taxable person, and potentially entitling it to deduct input VAT, the position will be otherwise where the holding is accompanied by direct or indirect involvement in the management of the subsidiary, through the carrying out of transactions subject to VAT, such as the supply to those companies of administrative, accounting, financial, commercial, information technology and technical services.
According to the ECJ, there is no exhaustive list of services qualifying as ‘involvement of a holding company in the management of its subsidiary’. The concept must rather be understood as covering all transactions constituting an economic activity, within the meaning of the VAT Directive, performed by the holding company for the benefit of its subsidiary. The ECJ concluded in particular that the letting of a building by a holding company to its subsidiary amounts to involvement in the management of that subsidiary. Input VAT deduction must thus be granted on the expenditures incurred by the holding company for the purpose of acquiring securities of that subsidiary, on condition that that supply of services is made on a continuing basis, that it is carried out for consideration and that it is taxed, meaning that the letting is not exempt, and that there is a direct link between the service rendered by the supplier and the consideration received from the beneficiary. In line with its previous case law, the ECJ held that expenditures connected with the acquisition of shareholdings in subsidiaries incurred by a holding company which involves itself in the management of those subsidiaries and which, on that basis, carries out an economic activity, belong to its general expenditures so that the VAT paid on those expenditures must, in principle, be deducted in full. However, should the holding company hold shares in multiple subsidiaries and be involved in the management of only some of those subsidiaries, the VAT paid on expenditures connected with the acquisition of the shareholdings may only be deducted in proportion to the expenditures which are inherent to the economic activity.