On July 16, 2015, the Court of Justice of the European Union (“CJEU”) rendered its judgment 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’. The CJEU ruled that a holding company that is actively involved in the management of its participations and which performs VAT taxable services for a fee is entitled to deduct the VAT on acquisition costs. It concerns costs incurred on the capital procured to acquire participations in subsidiaries. The CJEU also concluded that entities without legal personality can be included in a VAT group.
The simplified facts of the cases are: Larentia + Minerva mbH & Co. KG (“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. 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 (“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 part of the VAT deduction, because they 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.
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 entities without legal personality be included in a VAT group?
- Can a taxable person directly invoke the VAT group provision of the VAT Directive?
Numerous technical issues can be identified in the CJEU judgment. We will however only address four of them.
a) Full VAT deduction for active shareholdings
The CJEU ruled in line with earlier case law 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, it is entitled to a full VAT deduction. 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. 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 activities. This part of the CJEU judgment 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 CJEU also discussed the situation where a holding company also holds passive participations. According to the CJEU, a deduction limitation (‘pre pro rata’) may apply to the costs that also relate to those passive participations. The CJEU states that it is up to the national authorities of the Member States of the European Union (EU) to indicate how this should be calculated. The Netherlands has acted on this in the policy statement on VAT deductions (November 25, 2011, no. BLKB 2011/641M) (hereinafter: “policy statement”). This policy statement set outs general rules on the entitlement to a VAT deduction for businesses that perform economic and non-economic activities.
This situation – multiple participations, with or without involvement by the holding company – is also one that sometimes gives rise to discussions with the Dutch tax authorities. In our view, in certain situations there are however 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 shareholding is an extension of the economic activities of the holding company. This can be the case, for instance, if the shareholding is directly linked to the way in which the activities of the group are organized and legally structured, or if it is so closely related to the taxable activities that the holding company performs for the other subsidiaries that, taken together, there is only one economic activity. An example of this is a holding company that holds a participation for strategic business reasons and not as an investment.
If a VAT deduction limitation applies in certain situations, then it is still unclear in the Netherlands how the input tax should be split, given that the policy statement only includes general rules; agreement with the Dutch tax authorities therefore 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 CJEU did not explicitly address the amount of the costs in comparison to the amount of turnover, it nevertheless does appear to be of the opinion that the costs in both cases qualify as 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 and direct effect
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 CJEU, 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 would only be different if these conditions are necessary to avoid abuse or combat fraud. In the Netherlands, two entities without legal personality can be part of a VAT group, so that this point has no implications for the Dutch practice.
The CJEU’s final conclusion is that the VAT group provision in the EU VAT Directive does not have a direct effect, because this provision contains conditions whose implementation is left to the discretion of the Member States. This means that taxable persons cannot invoke them against their Member State if the laws of their Member State are incompatible with these rules.
What are your options?
The CJEU is very much in line with current practice in the Netherlands. This is not the case in all EU Member States, which means that the impact on holding companies in some Member States (e.g. Germany and the United Kingdom) may be considerable. It is therefore advisable to take a more detailed look at the VAT position of your holding structure in the Netherlands or in other EU Member States. If you are currently consulting with the Dutch tax authorities and supplemental 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 that you seek 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.