Advocate General takes position in VAT deduction previous message

Advocate General takes position in VAT deduction

Very recently, the Advocate General Mengozzi at the European Court of Justice delivered his opinion regarding the recoverability of input VAT for an active holding company. The opinion related to two different cases of two different tax payers (Larentia + Minerva GmbH & Co KG and Marenave Schiffahrts AG). In both cases a holding company received a small fee for services rendered to its participations.

Both holding companies incurred significant costs to acquire new participations or share flotation. In both cases, the German tax authorities refused the deduction of VAT, because it considered the costs related to the procurement of capital or share flotation to be attributable to non-economic activities (i.e. holding of shares).

The Advocate General disagreed and concluded that the costs for the acquisition of a participation cannot be attributed to 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.

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 a deviation of the approach of the Dutch tax authorities who tend to compare the amount of costs and the actual turnover. If the costs are only partly included in the turnover, they frequently propose a VAT deduction limitation on the holding company.

Way forward

We need to wait for the final verdict of the European Court of Justice in both cases. Nevertheless, we recommend to appeal or file a notice of objection if you are currently in discussion with the tax authorities on the recoverability of input VAT for active holding companies.

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