New guidelines from the Danish Tax Agency and new judgment from the European Court of Justice extend holding companies' right to deduct VAT
The question concerning the right to deduct VAT in holding companies has been on a long and turbulent journey but new guidelines from the Danish Tax Agency and a new judgment from the European Court of Justice (the "CJEU") provide clarity on the rules and, not least, the right to a refund of VAT.
Case law of the CJEU
In the early 1990s, cases where the CJEU and the tax authorities allowed VAT deductions in holding companies were few because holding companies were only to a limited extent found to have activities subject to VAT. However, over time it has become clear that when holding companies are involved in the management of their subsidiaries they are pursuing activities subject to VAT for which VAT on general expenses may be deducted.
The CJEU has previously established that involvement in the form of the provision of management, financial, commercial, IT-related and technical services to a company constitutes economic activities for which VAT on general expenses may be deducted. So far, the Danish Tax Agency has taken the view that the nature of services subject to VAT in the form of the letting of machinery and immovable property and the provision of cleaning services is not such that they could be deemed to constitute the necessary involvement in subsidiaries that could give rise to a right to deduct VAT.
However, the Tax Agency has had to adjust its practices based on a judgment by the CJEU dated 5 July 2018 (Marle Participation Sarl). The case concerned a holding company whose only activity consisted in letting immovable property to its subsidiaries. In 2009, the holding company conducted a restructuring operation of the group that included sales and acquisitions of securities, and in that connection it paid various expenditure that was subject to VAT. The French tax authorities refused the holding company's request for a right to deduct VAT because the authorities, similar to the Danish tax authorities, found that the letting of immovable property did not imply that the holding company was pursuing economic activities benefiting from a right to deduct VAT.
Nevertheless, the CJEU found, contrary to the French (and the Danish) tax authorities, that the letting of immovable property to a subsidiary is to be deemed an economic activity benefiting from a right to deduct VAT. This presupposes that the letting is made on a continuing basis, is carried out for consideration and that it is comprised by voluntary VAT registration for the letting of immovable property. The Court further concluded that expenditure connected with the acquisition of shareholdings in subsidiaries must be deemed to be general expenditure and that the holding company may deduct relating VAT in full.
Adjustment of practice
On 16 October 2018 the Tax Agency issued guidelines adjusting the practice as to when holding companies are pursuing economic activities benefiting from a right to deduct VAT. The adjustment of practice is that, in order to be deemed to be pursuing an economic activity resulting in a right to deduct VAT, the involvement of a holding company in a subsidiary cannot be limited depending on its nature. Accordingly, the nature of the letting of machinery and immovable property as well as the provision of cleaning services are now, similar to the judgment of the CJEU, deemed to be such that they constitute the necessary involvement in subsidiaries that gives rise to a right to deduct VAT.
Possibility of a refund
The holding companies that have not been allowed a right to deduct VAT under the Tax Agency's previous practice may request a reopening of their VAT reporting. The ordinary time limit for reopening a matter is three years but, in the guidelines, the Tax Agency recognises that the time limit for reopening a matter may be extended to the effect that matters relating to companies may be reopened back to a commenced but not expired tax period on 1 January 2009.
A request for a reopening of a matter must be submitted no later than six months after the publication of the guidelines, ie 16 April 2019.
New judgment from the CJEU further extends the possibility of deducting VAT
On 17 October 2018, the CJEU made another judgment (Ryanair) concerning the deduction of VAT that may affect holding companies. The case concerned the Irish airline Ryanair that made a bid to take over the Irish airline Aer Lingus in 2006. For reasons relating to compliance with competition law the takeover was not successful but Ryanair had already paid heavy expenses relating to consultancy services and other services in connection with the contemplated takeover. Accordingly, Ryanair deducted the input tax paid on this expenditure, but the Irish tax authorities refused the deduction.
The CJEU found that Ryanair had a right to deduct VAT on those expenditure. It was found that Ryanair had an intention to provide management services subject to VAT to the company taken over, and it was found that the expenditure paid had a direct and immediate link to such services. On those grounds, the CJEU recognised a right to deduct VAT on the consultancy services. It made no difference to the CJEU that, due to the abandoned takeover, the management services were not actually provided to Aer Lingus. It was crucial that Ryanair was able to prove that it had an intention to provide management services to Aer Lingus.
The influence of the judgment on Danish law
Companies that have not been granted a right to deduct VAT on expenditure incurred in relation to abandoned takeovers of businesses will also be entitled to a reopening of their VAT liability.
Has the issue reached its final destination?
The long journey for the holding companies' right to deduct VAT has probably not reached its final destination yet. Another matter, a request for a preliminary ruling from the Western Danish High Court (C & D Foods), is pending before the CJEU. The request concerns the right to deduct VAT for expenditure relating to services used for the purposes of a contemplated sale of shares in a subsidiary.
In her opinion submitted on 6 September 2018, the Advocate-General found that economic activities, in addition to the activities relating to the preparation of economic activities, also concern the activities leading to the termination of such activity. The sale of shares in a subsidiary leading to the termination of a, so far not pursued, activity subject to VAT, more specifically involvement in the management of the company in question for the purpose of carrying out transactions subject to VAT, also constitutes an economic activity. The Advocate-General further stated that a holding company cannot be granted a right to deduct VAT in relation to consultancy services that were used prior to a contemplated sale of shares in a subsidiary, if there is a direct and immediate link between those consultancy services and the contemplated transactions involving the sale of shares (exempt from VAT), and it is for the national court to establish whether that is the case.
The CJEU is not expected to make a judgment in the case in the near future.
Read Plesner Insight:
"New VAT-judgment from the CJEU gives rise to an adjustment of Danish practice"
Read the judgment relating to Ryanair here
Read the Advocate-General's opinion relating to C & D Foods here (English translation not available)