On March 26, 2015 Advocate General Mengozzi at the Court of Justice of the European Union (CJEU) rendered his Opinion in the joined cases Larentia + Minerva and Marenave Schiffahrts. These cases concern the VAT deduction position of holding companies and the conditions for a ‘VAT group’. Advocate General Mengozzi concluded that a holding company that is actively involved in the management of its participations is entitled to deduct the VAT charged on the costs it incurs on the capital procured to acquire participations and subsidiaries. He also concluded that partnerships can be included in a VAT group.
1. The case
The simplified facts of the cases are: Larentia + Minerva mbH & Co. KG (hereinafter “Larentia”) is a partnership incorporated under German law (an entity without legal personality). Larentia holds two participations, for which it provides administrative and commercial services for consideration. The participations operate full container ships. In order to acquire several new participations, Larentia incurred costs on which VAT was charged. The VAT on these costs amounted to more than EUR 760,000, while the turnover of the VAT taxable services was considerably less than this in the first year. The facts in the second proceedings are almost the same. Marenave Schiffahrts AG (hereinafter “Marenave”) incurred costs for a share issue (the VAT is more than EUR 373,000). In the year in question it received a small fee for the management services it provided to its participations. Both taxable persons deducted the VAT charged on the costs related to the acquisition of the participations and the share flotation.In both cases, the German tax authorities refused to allow the VAT deduction, because it considered the costs related to the procurement of capital and to the share flotation as partly attributable to the ‘non-economic activities’ of the holding company, i.e. the holding of shares. We would like to note that the legal form under which the taxable persons or their participations operate in both cases is not recognized as such under Dutch civil law. It concerns a (G)mbH & Co. KG; a partnership with limited liability.
The national German court requested the CJEU to render a preliminary ruling on the following questions (these questions are represented in simplified form here):
- Were Larentia and Marenave correct in deducting the VAT charged on the costs incurred on the procurement of capital and on the share flotation?
- Can partnerships without legal personality be included in a VAT group?
2. Advocate General’s opinion
Numerous technical issues can be identified in the Advocate General’s Opinion. We will however only address four of them.
a) No VAT deduction limitation for active shareholdings
The Advocate General’s conclusions are in line with earlier CJEU case law, which ruled that where a holding company is involved with the management of its subsidiaries and this holding company incurs costs for the acquisition of a participation, these costs cannot, fully or partly, be attributed to its non‑economic activities. These costs qualify as general costs of the company and have an immediate and direct correlation with the total business activities of the holding company. This once again confirms that the holding of a participation, which is managed for a fee, does not give rise to a VAT deduction limitation in respect of the shareholding. A VAT deduction limitation can, at most, apply if the holding company, in addition to the provision of VAT taxable services, also performs VAT-exempt transactions. This part of the Opinion is, in our view, in line with current Dutch practice and the underlying intention of the Holding Resolution (February 18, 1991, VB91/347).
b) VAT deduction limitation may apply to passive shareholdings
Although Larentia and Marenave only held participations that they managed, the Advocate General also discusses the situation where a holding company also holds passive participations. According to the Advocate General, a deduction limitation (‘pre pro rata’) may apply to the costs that also relate to those passive participations. He states that it is up to the EU Member States to indicate how this should be calculated. This point in the Opinion – multiple participations, with or without involvement by the holding company – is also one that sometimes gives rise to discussions with the Dutch tax authorities. However, in this context we believe that there are still good grounds for arguing that passive shareholdings do not affect an active holding company’s entitlement to deduct VAT, either pursuant to the Holding Resolution or on other grounds (for example, if the holding of shares is an extension of the business). If a VAT deduction limitation does apply in these situations, then it continues to be unclear in the Netherlands how the input VAT should be split: there are no rules on this and therefore agreement with the Dutch tax authorities needs to be sought on a case-by-case basis.
c) Relationship between costs and turnover?
In both cases the costs incurred in the year in which the participations were acquired and the shares floated were considerably higher than the VAT taxable turnover. Although the Advocate General did not explicitly address the amount of the costs in comparison to the amount of turnover, he nevertheless does appear to be of the opinion that the costs in both cases qualify as a general costs. This is in itself an important factor, because, in practice, the Dutch tax authorities tend to compare the amount of costs with the amount of turnover. If the costs are not, or only partially, included in the turnover, the Dutch tax authorities are quick to propose a VAT deduction limitation on the holding company.
d) Conditions applying to a VAT group
German law imposes a number of conditions on a VAT group: (i) entities without legal personality cannot be included in a VAT group; and (ii) inclusion in a VAT group requires a hierarchical relationship between the members of the group. According to the Advocate General, these conditions are contrary to the EU VAT Directive (although the case was referred to the CJEU by virtue of the Sixth Directive − the forerunner to the EU VAT Directive − no amendments are envisaged on this point). This could only differ if these conditions were imposed to prevent abuse or tax fraud; something which the Advocate General appears to doubt. This conclusion appears to be in line with current Dutch practice.
3. What are your options?
Now that the Advocate General has rendered his Opinion, the CJEU is expected to render its judgment within the coming months. The outcome of these cases is important for the VAT position of holding companies, but it is also important for other businesses that may face a ‘non-economic environment’ (educational institutes and partly subsidized businesses for example).
If you are currently consulting with the Dutch tax authorities and supplemental VAT assessments have been or will be imposed, then we advise filing a notice of objection in order to preserve your rights. If you shortly expect to incur costs related to a planned share flotation, share issue or if you are considering a restructuring, we recommend that you ensure seeking advice on the VAT consequences of this on time. The advisors of the Indirect Tax Group of Meijburg & Co would be pleased to assist you further with this issue. Feel free to contact one of these tax advisors or your regular contact for more information.