On January 12, 2017, the Court of Justice of the European Union (CJEU) ruled that tax authorities can deny VAT deductions on services procured by a holding company that does not impose a service charge on its subsidiaries.
The decision in Magyar Villamos Művek Zrt. (MVM) v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatóság (Case C-28/16) highlights the importance of planning to secure the subsequent deductibility of the holding company’s VAT expense, write Daan Arends and Wouter Kolkman of DLA Piper, Netherlands in a recent article for BNA Insights.
Facts and Decision
MVM is a Hungarian state-owned energy company that deducted input VAT with respect to the services it procured. MVM provided some of these services to its subsidiaries, but did not impose a recharge, nor did it impose a general strategic management charge. Furthermore, neither MVM nor its subsidiaries were included in a VAT group.
The Hungarian tax authorities denied MVM a VAT deduction on the services that it procured in the interests of its subsidiaries or in connection with certain share acquisitions. MVM contested this decision. Ultimately, the Hungarian Supreme Court referred the appropriate treatment of the services to the CJEU, in light of the general rule that input VAT recovery requires a direct and immediate link between input transactions and taxable output transactions.
The CJEU noted the established rule that the mere acquisition and holding of shares in a company is not an economic activity eligible for input VAT deductions. Nonetheless, a holding company that is involved in the management of its subsidiaries is generally considered to engage in a taxable activity to the extent that it supplies taxable services to its subsidiaries, such as administrative, financial, commercial and technical support. However, since MVM did not normally charge consideration for its management services, the CJEU found that the services could not be regarded as an economic activity. Accordingly, MVM’s related input VAT expense was not eligible for input VAT deductions.
In sum, the CJEU ruled that VAT deductions on services procured by a holding company for the benefit of its subsidiaries may be denied if the holding company does not charge its subsidiaries for the services or for any other management or administrative services.
Plan Today, Deduct Tomorrow: Lessons from MVM
Arends and Kolkman note that European holding companies may avoid the outcome in MVM by charging their subsidiaries VAT for procured services and management support.
Alternatively, a holding company and its subsidiaries may form a VAT group, so that intracompany transactions are disregarded, and VAT expense incurred by the parent company is treated as incurred by the group as a whole.
Click here for the full text of the BNA Insights article about the MVM case.
By Joanna Norland, Technical Tax Editor, Bloomberg BNA
Daan Arends is the Dutch author for the Bloomberg BNA VAT Navigator.
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