Company confronted with limitation of VAT deduction due to holding activities
In the MVM case the CJEU recently decided by order that a company is confronted with a VAT deduction limitation due to its holding activities. When you are involved with a holding company or a company that also carries out holding activities it is important to take note of this case and identify your own VAT position.
31 January 2017
The facts of the case
MVM is a Hungarian State-owned commercial company that is active in the energy sector. It leases power plants and fibre optic networks. It also has a number of subsidiaries, whose main activity is to generate or sell electricity. MVM and its subsidiaries are not part of a VAT group.
In its capacity as parent company responsible for strategic management MVM procured legal, business-management and public-relations services. These services where of the benefit of itself, the entire group and each member of the group. MVM deducted the VAT charged to it by the suppliers of those services. MVM did not, save for a few exceptions, charge the subsidiaries with these costs of strategic management, nor did it impose a general charge on the subsidiaries for its management activities.
The Hungarian tax authorities were of the view that MVM could deduct the VAT only to the extent to which it had used the services in order to effect supplies of goods or services. Thus, the tax authorities refused MVM the right to deduct the VAT relating to the services where the services had been carried out in the interest of the other members of the group or where the services concerned business-management services related mainly to the acquisition of shareholdings.
In its order in the MVM case the CJEU repeats its classic case law on the VAT status of holding companies. It first establishes that a holding company which has as its sole purpose the acquisition of shares in other undertakings and which does not involve itself directly or indirectly in the management of those undertakings does not have the status of taxable person. It then states that 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 for those subsidiaries, such as the supply by a holding company to its subsidiaries of administrative, financial, commercial and technical services. The mere involvement of MVM in the management of its subsidiaries without carrying out transactions subject to VAT for those subsidiaries is not an economic activity.
As a consequence MVM cannot deduct the VAT on costs that have a direct and immediate link with its holding or management activities – as it did not charge a fee for its activities to its subsidiaries. If costs relate to both MVM’s leasing activities and holding and management activities the VAT will be deductible to a certain proportion. The CJEU furthermore notes that it appears difficult to imagine that the services at issue, namely services procured in the interest of other members of the group and business-management services relating mainly to the acquisition of shareholdings, may have a direct and immediate link with MVM’s leasing activity, considered overall. It is for the referring Hungarian court to decide on this.
Position of Dutch holding companies
The position of Dutch based holding companies is in our view different than the position of MVM. First of all, because a holding company such as MVM that qualifies as a taxable person, can be part of a VAT group in the Netherlands. What is more, based on the so called holding decree, a holding company that carries out management activities, but does not charge its subsidiaries for this activity can be included in the VAT group as well.
If VAT grouping is not an option Dutch holding companies can in our view rely on section 11 of the holding decree. In this section it is stated that when a person is already a taxable person, holding activities will not have an effect on its right to deduct VAT if it holds shares for the benefit of its business. However holding companies that rely on this section are in some cases challenged by the Dutch tax authorities, which state that section 11 has become outdated due to CJEU’s case law. Those holding companies are faced with a limitation on their right to deduct VAT.
The future for holding companies
An amended version of the holding decree is expected in the (near) future. The expectation is that it will be amended on the aspect of VAT deduction and that holding companies that do not charge a fee to their subsidiaries will be confronted with a limitation of VAT deduction.
What can you do?
Because an amendment of the holding decree is expected shortly and the Dutch tax authorities already challenge the right to deduct VAT of holding companies in certain situations, we advise you – if possible – to charge a fee to subsidiaries for (management) activities.
If charging a (management) fee is not an option we advise you to explore your options to be part of a Dutch VAT group.
If VAT grouping is also not an option, e.g. because the subsidiaries are established abroad, we advise you to explore your VAT position together with your VAT advisor in advance to establish the possible VAT consequences.