On January 12, 2017 the Court of Justice of the European Union (CJEU) issued an Order of the Court concerning the VAT deduction right of a holding company that is actively involved in the management of its participations and also carries on a business with substance. In the MVM case (C-28/16), the CJEU ruled that a VAT deduction limitation can apply to a top holding company that, in addition to actively carrying on a business, is also involved in the management of its participations, without charging a fee for this. This case once again shows how important it is to properly analyze the VAT position of holding companies that are actively involved in the management of their participations, but also of businesses with substance.
1. The case
MVM Magyar Villamos Művek Zrt. (hereinafter: MVM) is a Hungarian state-owned power company. It performs activities that are subject to VAT by leasing power plants and fiber optic networks. In addition to this, MVM holds numerous participations which are involved with the generation or distribution of electricity. MVM concluded a ‘contract of control’ under Hungarian law with its subsidiaries, which resulted in it being able to call itself a “recognized corporate group”. The group is not a VAT group.
MVM is responsible for the strategic management of the group, but does not charge a fee for this. In actual fact, it thus performs its management activities free of charge. On behalf of the group MVM procures various legal, business management and public relations services which it uses for:
- its own activities that are subject to VAT;
- the VAT-taxed activities of individual members of the group;
- the VAT-taxed activities of the entire group.
MVM deducts all the VAT charged and contends that all the services involved qualify as general overhead associated with its VAT-taxed activities. It does not perform any VAT‑exempt activities. MVM does not consider that the fact that it does not recharge the procured services to its participations affects its right to deduct VAT. The position of the Hungarian tax authorities was that only the VAT on services procured which are directly attributable to the activities listed under (i) can be deducted. The Hungarian court decided to ask the CJEU for a preliminary ruling on the VAT deductibility of the other two expense categories (ii and iii).
2. CJEU decision
The CJEU firstly ruled on whether involvement in the management of the participations without a fee being charged for this qualifies as an economic activity. In line with its earlier case law, the CJEU answered this question in the negative: any involvement in the management of participations for which a fee is not charged falls outside the scope of VAT and is therefore not an economic activity.
The CJEU then ruled on whether the procured services qualify as general overhead. This is expenditure that has a direct and immediate link with the overall business activity of MVM, thus with the leasing activities. The CJEU finds it difficult to believe that in this situation the procured services intended for the management of MVM’s participations are directly related to the leasing activities. It is however up to the Hungarian court to examine this in more detail.
The CJEU also rejected the taxable person’s “group rationale”: MVM argued that the services involved were procured in the interest of the entire group and, as such, are related to the VAT-taxed activities of the MVM group. However, according to the CJEU, the procured services must, in principle, be attributed to the involvement in the management of the participations, which is performed free of charge, and that these services are thus directly related to a non-economic activity.
The Hungarian court must now determine whether this only involves costs related to services for which there is no entitlement to deduct VAT (involvement in the management, without a fee being charged) or whether there are also costs that affect the entire business. In the latter case, there is a partial entitlement to deduct VAT based on a ‘pre pro rata’. A pre pro rata reflects the relationship between the costs attributable to both the economic activities (leasing activities for which a fee is charged) and the non-economic activities (involvement in the management, for which no fee is charged) performed by MVM. The CJEU left it up to the individual EU Member States to decide on how the pre pro rata should be determined.
3. Impact on the Dutch practice
The MVM case appears to essentially rule out a VAT deduction, because the CJEU considers that the costs incurred only relate to the non-economic activity of the holding company that is actively involved in the management of its participations. Because this involves a fact, the Hungarian court must investigate this further. In the Dutch practice, it would be possible to (partially) deduct the VAT in an MVM-comparable situation, if one of the following circumstances applies:
- There is a VAT group between the holding company that is actively involved in the management of its participations and its subsidiaries, whether or not by virtue of the Holding Decree.
- The holding company that is actively involved in the management of its participations recharges the services received for the participation in accordance with the arm’s length principle.
- In practice, attributing costs to economic or non-economic activities is not always easy. In this respect, agreements can sometimes be made for practical reasons with the Dutch tax authorities.
- In special circumstances it is possible to argue that the non-economic activities of the holding company that is actively involved in the management of its participations are an extension of the VAT-taxed business of a participation (or vice versa).
Where costs are partly or solely related to the non-economic activities of the holding company (managing participations free of charge), a limitation on the amount of VAT to be deducted should be taken into account. In practice, this could simply be the case if taxable persons with a business with substance do not provide services to any of their direct participations, or provide services but do not charge a fee for this. In particular, foreign participations deserve attention here, because they cannot be part of a VAT group with the Dutch holding company.
We regard the MVM case as a missed opportunity for the CJEU to deal with the “group rationale” in more detail. In our view, the situation of MVM − that as a business with substance strategically manages its entire group − was an ideal opportunity to elaborate on the group rationale. After all, it can be argued that the group-related costs that were not recharged by MVM were ultimately included in the price of the products of the entire group. In the case of a group with VAT-taxed activities, we consider it undesirable to apply a VAT deduction limitation solely because of the organizational structure chosen, whereby businesses are related through the holding of shares.
4. What are your options?
Based on the above, we recommend a closer examination of the VAT position of holding companies that are actively involved in the management of its participations, but also of businesses with substance, if these businesses hold participations. Special attention should be paid to the relationship the holding company has with its subsidiaries and the impact of this for VAT purposes. In this area, there are various ways to make the best use of the holding company’s entitlement to deduct VAT. The advisors of the Indirect Tax Group of Meijburg & Co would be pleased to assist you further with this. Feel free to contact one of these tax advisors or your regular contact for more information.