Input tax deduction of a holding company
The European Court of Justice (ECJ) recently ruled that a holding company that makes output transactions for consideration to subsidiaries is not entitled to deduct input tax if the input services received are not directly and immediately related to the holding company’s own transactions but to the largely tax-exempt activities of the subsidiaries.
The problem of input tax deduction by the (managing) holding company is not new and has been a challenge for practice and case law for years. Recently, the ECJ also dealt with this issue again:
The case to be assessed concerns a W-GmbH (plaintiff), a mixed holding company, which holds controlling interests in two subsidiaries (T-KGs), which in turn built construction properties and then sold the individual residential units without paying tax. The T-KGs were therefore not entitled to an input tax deduction.
On the one hand, W-GmbH provided the T-KGs with building-related services free of charge (e.g. architectural services, static calculations, planning of heat and sound insulation, energy supply and network connections, general contractor services, development services and sales services), which it itself purchased on a large scale. On the other hand, it provided paid and comparatively minor accounting and management services to the two T-KGs.
W-GmbH was of the opinion that it could make a full input tax deduction from the services purchased on a large scale and inserted into the T-KGs, since it had a VAT sphere in view of the services provided for payment (even if only slightly), to which the two participations (T-KGs) could also be assigned.
The German tax authorities did not follow this legal opinion.
Judgment of the ECJ
According to the ECJ, a holding company which carries out taxable output transactions to subsidiaries is not entitled to deduct input tax on supplies which it purchases from third parties and deposits in the subsidiaries in return for the grant of a share in the general profits, if
- firstly, the input services received are not directly and immediately related to the holding company’s own turnover, but to the largely tax-exempt activities of the subsidiaries,
- secondly, these input services are not included in the price of the taxable sales made to the subsidiaries, and
- thirdly, these services do not form part of the general cost elements of the holding company’s own economic activity.
For the input tax deduction of a (managing) holding company, it is therefore important that those inputs for which the input tax deduction is claimed are also related to the services provided by the holding company against payment and that these inputs are also taken into account in the price calculation.