Further to our recent VAT blog article on the Larentia + Minerva mbH & Co. KG case (C-108/14) the ECJ released its judgment on 16 July 2015.
In summary three questions had been referred to the ECJ:
- the first question concerned the availability of input tax deduction on costs relating to the “passive” and “active” activities of holding companies.
- the second question sought clarification on whether partnerships could be included in a VAT group and,
- the third question asked whether the VAT grouping provisions in the Directive have direct effect.
With regard to the first question the ECJ confirmed that the acquisition and holding of shares is not a business activity. A business activity does however exist in situations where the holding company is also involved in the “active” management of subsidiaries by undertaking activities subject to VAT such as administrative, financial, commercial and technical services. Input VAT can be deducted where it has a direct and immediate link with particular taxable supplies or is part of the business’s general costs.
The ECJ agreed with the AG’s view that expenditure connected with the acquisition of shareholdings in subsidiaries incurred by an active holding company is attributable to its economic activity with the right to full input tax deduction, subject to the normal partial exemption rules.
If a holding company ‘actively’ manages some subsidiaries but ‘passively’ holds interests in others then the method of apportionment of input VAT to be used between the business and non-business activities is at the discretion of the Member States.
In response to the second question the ECJ held that Member States cannot restrict VAT grouping to corporate bodies or bodies under common control except to prevent abuse of law and tax avoidance or evasion. It should therefore now be possible for partnerships to be included in VAT Groups.
Finally, in answer to the third question the ECJ found that the EU VAT grouping provisions are not sufficiently specific and unconditional to have direct effect.
The full judgement can be viewed here.
This decision is a milestone for the VAT recovery position of holding companies and VAT grouping provisions. Affected businesses should watch out for an announcement of changes in HMRC’s policy in these areas.