Right to deduct of holding company: Opinion of the Advocate General in the case C-42/19 has been saved
Right to deduct of holding company: Opinion of the Advocate General in the case C-42/19
17 June 2020
On 14 May 2020 , the Advocate General of the Court of Justice of the European Union (CJEU), Mrs. Kokott, delivered her opinion on the case C-42/19 regarding the right to deduct of a holding company. She recognizes that an active holding company could deduct VAT concerning expenditure supported to raise the capital necessary to acquire shares in a company to which it intended to supply taxable services, even if that acquisition ultimately did not materialize and applies irrespective of the amount of VAT payable concerning the planned services. However, the VAT becomes non-deductible if the capital collected for the acquisition is used to grant a loan to another company. The Advocate General, however, opens the door to the possibility of regularizing the deduction, should the costs qualify as capital items and the capital be ultimately used for activities that create the right to recover VAT. The Court should issue its judgment by the end of 2020 but may deviate from the Advocate General’s conclusions.
The case under analysis refers to a Portuguese holding company that also manages and provides strategic coordination to companies operating in the telecommunications, media, software and systems integration markets. Therefore, this company could be qualified as an “active” holding company, i.e., a company with taxable and non-taxable activities. Such companies can at least partly recover VAT on their costs under the conditions and the limits of the quite complex CJEU jurisprudence and its interpretation by the different national VAT authorities.
In 2005, the holding company wanted to invest in the new business segment “Triple Play”. In this respect, it acquired consultancy services related to market studies for the possible acquisition of shares in another company. In addition, the holding company paid a taxable commission to a bank to put together and guarantee the placement of a private issuance of bonds. The capital obtained was intended to be used to acquire shares in the telecommunications company and also to provide technical support and management services to that company. The VAT at stake was around €1,000,000.
As the acquisition of the shares did not materialize, the holding company lent the unused capital to its parent company.
The deduction of the input VAT incurred regarding both the consultancy services and the bank commission was denied by the Portuguese VAT authorities because the acquisition of shares fell outside the scope of VAT and that the granting of credit was exempt and, therefore, not entitled to input VAT deduction.
The company did not accept the position of the VAT authorities and lodged a legal action with the Portuguese tribunals. In the course of this action, the Supremo Tribunal Administrativo decided to refer the case to the CJEU.
Summary of opinion
The Advocate General referred first to the CJEU’s case-law regarding mixed holding companies as taxable persons, highlighting the recent Ryanair case (C‑249/17) regarding the deductibility of expenditure arising in preparation for activities not subsequently carried out by the taxable person. The Advocate General also emphasized that the disproportion between the amount of the deduction and the amount of a holding company’s tax liability based on its planned management services, which regularly occurs in these cases, should not affect the principle that the VAT is deductible. As practitioners and concerned businesses are aware, this question is of prime importance.
Therefore, the Advocate General considers that a mixed holding company, like the one in the present case, has the right to a full deduction regarding expenditure for the acquisition of shares in a company to which it intended to supply taxable services, even if this acquisition did not materialize.
However, the company had lent the capital of the issued bonds to its parent company. Such a loan does not create the right to recover VAT and, therefore, the Advocate General considers that this VAT-exempt activity performed in the same tax period, rather than the originally planned activity, affects the deduction.
The company also argued that the VAT should remain deductible because the loan was temporary and the capital would ultimately be used to acquire shares as an active holding company. The Advocate General rejected this interpretation.
However, she opens the door to the regularization of the VAT, should the capital be effectively used for activities opening the right to deduct VAT and if the costs could be assimilated to capital costs. We should restate that article 55.2. of the Luxembourg VAT law rules that services that share the same characteristics as capital goods are subject to the five years adjustment period (ten years in case of immovable items).
The next step is for the CJEU to issue its judgment. This is normally three to six months following the conclusions of the Advocate General, so we would expect this to arrive by the end of 2020. We reiterate that the Court does not always follow the conclusions of the Advocate General.
Whatever the Court’s decision, the conclusions highlight once again the importance of a careful analysis of the factual pattern to determine the VAT deduction right and that taxpayers should also take VAT into account when they perform capital and financial transactions.
Should the Court follow or reject the Advocate General’s opinion, its decision may have a significant impact on holding companies. In the meantime, concerned businesses should examine whether the decision of the Court may affect their input VAT deduction right.