VAT and holding companies

07.2013

VAT is a tax that affects business persons, but in some cases, this concept is not so clear, and some registered companies are in fact not considered business entities from the VAT point of view, even though they are in regards to other taxes. This is the case of companies whose only purpose is to manage their shares in other companies pertaining to the group. Depending on how their activity is organised, they will be deemed as business entities in regards to VAT, which largely affects the deductibility of input VAT.

Over recent years, this matter has been examined by the EU Court of Justice. By way of example, the ruling of 29 September 2009 (C-29/2008), which describes how VAT is applied in such cases, is worthy of mention. More recently, the Spanish tax administration has also dealt with this issue (consultation V0764/2011 of 24 March 2011).

The following conclusions were reached: a) In the case of pure holding companies that do not provide services to their subsidiaries and only collect the dividends of such subsidiaries, the holding is not deemed to perform an economic activity, and therefore, it is not subject to VAT. We must remember that VAT is applied on consumption, not on savings, so the mere collection of income is outside the scope of VAT, as no value added is generated; b) Mixed holding companies – that do provide services to their subsidiaries – are deemed to perform an economic activity subject to VAT, both for the services performed and the sale of shares, although not for the collection of dividends; c) The acquisition of shares by mixed holding companies is deemed to be related to their economic activity, and therefore, the input VAT incurred on the expenses relating to such acquisitions is deductible according to the pro-rata applicable to the holding’s activity.

++Published at the tax newsletter of the German Chamber of Commerce related to VAT news.++