On February 29, 2015 the Court of Justice of the European Union (CJEU) was asked to render a preliminary ruling in the MVM case (case no. C-28/16) on the right of a top holding company − that is actively involved in the management of its participations − within an energy group, to recover VAT. This concerns a situation that has never been dealt with before, in which a company that actively carries on a business is also involved in the management of its participations. The holding company does not charge a fee for its involvement in the participations. This case affects the core of the Dutch Holding Resolution – to put it bluntly: ‘no VAT deduction limitation for a top holding company that is actively involved in the management of its participations within a group’ – and is therefore definitely of importance for the Dutch practice.
MVM Magyar Villamos Művek Zrt. (hereinafter: MVM) operates a power company and is also a holding company. It is involved with the leasing of power plants and optical fiber networks for a fee. In addition to this, MVM has several subsidiaries that are primarily involved with the generation, sale and transmission of electricity, as well as the associated grid management. MVM is involved in the management of these companies, but does not charge a fee for its role as holding company, nor does it issue invoices for the management function it performs. In actual fact, it performs the holding company activities free of charge.
MVM forms together with its subsidiaries a ‘recognized group of companies’ in accordance with the Hungarian Law on Commercial Companies. This group does not have a separate legal personality: each member retains its own legal personality. In order to realize the business goals of the group, MVM was appointed as the controlling company so that it can act as a strategic and central holding company for its subsidiaries. On behalf of the group, MVM purchases various legal, business and advertising services, which it uses for:
a) its own activities that are subject to VAT;
b) the activities of the participations;
c) the activities of the entire group.
MVM orders the services in its own name, pays the service providers and deducts the VAT stated on the invoices. The Hungarian tax authorities, however, take the position that MVM has wrongfully deducted this VAT. To this end, it − briefly put − argues that most of the purchased services are not directly attributable to the VAT taxed activities of MVM as referred to under a.
Preliminary ruling requested by the Hungarian Supreme Court
The Hungarian Supreme Court believes that the CJEU has, to date, never ruled on the right to recover VAT of a holding company that is actively involved in the management of its participations and that acts passively by not recharging the costs of the purchased services. The Hungarian Supreme Court therefore asked the CJEU whether MVM qualifies as a VAT taxable person for the purposes of its holding activities and whether it is entitled to recover VAT in this respect.
Current Dutch practice and impact
Under current Dutch practice, a holding company that carries on a business with activities that are fully VAT taxed and in addition to this holds participations in which it is actively involved, will not often be faced with a VAT deduction limitation. This also applies if no fee is charged for this involvement. Such a group – whether or not on the basis of the Holding Resolution (February 18, 1991, no. VB91/347) – will usually be able to be regarded as a VAT group. Furthermore, under certain special circumstances it is possible to reach agreement with the Dutch tax authorities that the active holding of participations is an extension of the (VAT taxed) business of the holding company. Such situations arise, in particular, in respect of top holding companies that control a group, whereby the group companies perform activities that are subject to VAT.
For the holding company that qualifies as a VAT taxable person but that does not control a group (for example, a licensing company), the Holding Resolution approves, in principle, that the additional holding of shares does not affect the existing right to recover VAT. There has, however, been a slight shift in this interpretation due to the progression in European case law in cases such as Securenta (C-437/06) and Larentia + Minerva (C-108/14 and C‑109/14). Nowadays, the Dutch tax authorities are increasingly demanding that such holding companies split the VAT paid on purchases into a deductible and a non-deductible part (the pre pro rata). The Holding Resolution is long overdue for amendment and the question is whether the outcome of this case will affect any amendment of it.
What are your options?
On the basis of the above, we recommend that the VAT position of holding companies – established in the Netherlands and/or in other Member States of the European Union – be reviewed or monitored. If you are currently consulting with the Dutch tax authorities and supplementary assessments have been or will be imposed, then we advise filing a notice of objection in order to preserve your rights thereby making reference to the MVM case (C‑28/16). It may in some cases be advisable to await the CJEU ruling in this case. 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.