The ECJ’s judgment in the Larentia + Minerva mbH & Co. KG case (C-108/14) is expected to be delivered on 16 July. This is an important case concerning the recovery of input VAT by holding companies.
If the ECJ follows the Advocate General’s opinion then the outcome could be very beneficial for “active” holding companies since restriction of input VAT may no longer apply to the cost of acquiring and financing subsidiaries. Their entitlement to VAT recovery could depend on their taxable and exempt business activities with no need to make an apportionment to reflect the non-business activities of “passive” holding companies, i.e. holding shares and receiving dividends.
In this case the taxpayer had deducted in full input VAT it had incurred in raising finance from a third party which it used to fund the acquisition of shares in subsidiaries and provide taxable management and consultancy services to those subsidiaries for consideration.
The tax authority challenged this and only allowed partial deduction (22%), on the basis that the majority of the costs connected with the acquisition of the subsidiaries were attributed to a non-business activity of Larentia + Minerva, in particular the holding of shares in the subsidiaries, for which there should be no input VAT deduction. Larentia + Minerva appealed the tax authority’s decision. The appeal was dismissed at the court of first instance and Larentia + Minerva then appealed to the referring court.
The relevant question referred to the ECJ for a ruling was:
“Which calculation method is to be used to calculate a holding company’s (pro rata) input VAT deduction in respect of input supplies connected with the procurement of capital for the purchase of shares in subsidiary companies, if the holding company subsequently (as intended from the outset) provides various taxable services to those companies?”
In the AG’s opinion the judgment in Cibo demonstrated that expenditure incurred on the acquisition of shares in companies had a direct and immediate link with the activities of the management holding company as a whole. The AG believes the expenditure was connected purely with its business activity, and there was no requirement to take account of the non-business activity of holding and managing shares.
The holding company should, in principle, therefore be permitted to deduct all the VAT paid provided that it was not also making exempt business supplies. The AG considered that Cibo was authority that the input VAT incurred by the Taxpayers on their acquisitions was incurred wholly for business purposes, and the same principle could be applied to expenditure incurred in the raising of capital, where the ECJ’s judgment in Kretztechnik showed that an issue of shares was not a supply for VAT purposes and the costs incurred could be treated as overheads of the business as a whole.
Questions regarding German domestic law on VAT Grouping have also been referred to the ECJ, including whether a partnership should be eligible to join a VAT group.
The full AG’s opinion can be viewed here.
Any “active” holding companies or businesses with appeals stood over behind this case should be sure to look out for the decision and be prepared to take action if the Court follows the AG’s opinion.