Flashback on ECJ cases C-108/14 and C-109/14 (Larentia + Minerva) – VAT paid by holding companies for the acquisition of capital invested in their subsidiaries

On July 16, 2015, the ECJ has issued his decision on joint cases C-108/14 and 109/14 (Larentia + Minerva) related to the VAT paid by holding companies for the acquisition of capital invested in their subsidiaries

Article in the EU VAT Directive

Articles 4(4) and 17(2) and (5) of the Sixth Council Directive 77/388/EEC

Article 4

4. The use of the word ‘independently’ in paragraph 1 shall exclude employed and other persons from the tax in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability.
Subject to the consultations provided for in Article 29, each Member State may treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organizational links.

Article 17

2 . In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:
( a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;

(b) value added tax due or paid in respect of imported goods;

5 . As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3 , in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions. This proportion shall be determined, in accordance with Article 19, for all the transactions carried out by the taxable person.

However, Member States may:

( a) authorize the taxable person to determine a proportion for each sector of his business, provided that separate accounts are kept for each sector;

( b) compel the taxable person to determine a proportion for each sector of his business and to keep separate accounts for each sector;

( c) authorize or compel the taxable person to make the deduction on the basis of the use of all or part of the goods and services;

(d) authorize or compel the taxable person to make the deduction in accordance with the rule laid down in the first subparagraph, in respect of all goods and services used for all transactions referred to therein;

(e) provide that where the value added tax which is not deductible by the taxable person is insignificant it shall be treated as nil.

Facts

The applicant in Case C-108/14 is a holding company which in 2005, as umbrella fund, has a stake (as a commander) in two subsidiaries, in both cases of more than 98%. Both daughters are in possession of a full container ship. On 1 March 2005, the applicant concluded a ‘service provision agreement’ with both subsidiaries, mainly for the provision of administrative services and advice. From 2006 onwards, the applicant will receive a compensation of € 295,000 per year excluding VAT. Extra for 2005 was the advice in the founding phase and the day-to-day management, for which she received a fixed fee of € 97,000 excluding VAT.

In 2005, the applicant raised capital for € 25,795,000, of which amount it invested € 20,040,000 in the subsidiaries. It pays a total of € 764,121.07 in VAT to the issuing company. She will deduct this amount as input tax for 2005. However, the defendant (Finanzamt Nordenham) only agrees to an amount of € 170,475.41 because the applicant used the collected amount for a non-economic activity (participation in subsidiaries) for which there is no right to deduct. However, the applicant relies on judgments C-16/00 and C-29/08 from which it appears that the way in which it has organized its holdings has the effect of making input tax fully deductible. She also believes that she is entitled to the VAT deduction because she and the subsidiaries form a fiscal unity.

In Case C-109/14, Marenave Schiffahrts AG is a party to the tax authorities. Here too, the question arises as to what the applicant may deduct for the purpose of raising capital that is also invested in subsidiaries here, and the holding company subsequently provides taxable administrative services for those subsidiaries. This case concerns 2006 in which € 150,000,000 is attracted by the IPO and € 373,347.57 is paid in VAT. The applicant uses this money on the international charter market for container ships and tankers for which she is setting up two ‘shipping CVs’. Here, too, services are provided by the applicant, otherwise as in Case C-108/14. The respondent is of the opinion that judgment C-98/08 does not apply here because it does not involve restructuring a group.

Source Minbuza.nl

Questions

Which calculation method is to be used to calculate a holding company’s (pro rata) input tax 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?

Does the provision on the consolidation of several persons into a single taxable person in the second subparagraph of Article 4(4) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes ¹ preclude national legislation under which (firstly) only a legal person, but not a partnership, can be integrated into the undertaking of another taxable person (a so-called ‘Organträger’ (controlling company)) and which (secondly) requires that this legal person ‘is integrated into the undertaking of the Organträger’ in financial, economic and organisational terms (in the sense of a relationship of control and subordination)?

If the previous question is answered in the affirmative: can a taxable person rely directly on the second subparagraph of Article 4(4) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes?

AG Opinion

(1) Expenditure connected with capital transactions incurred by a holding company which involves itself directly or indirectly in the management of its subsidiaries has a direct and immediate link with that holding company’s economic activity as a whole. Input value added tax on that expenditure should not therefore be apportioned between the economic and non-economic activities of the holding company. If the holding company effects transactions which are subject to value added tax and transactions which are exempt, the proportion method provided for in Article 17(5) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment will be used to calculate the right to deduct input value added tax.

(2) The second subparagraph of Article 4(4) of Sixth Directive 77/388 precludes a Member State, in the exercise of the option available under that provision, from making the formation of a VAT group subject to the condition that all the members of that group must have legal personality, unless that condition is justified by the prevention of abusive practices or of tax evasion or avoidance, having due regard to EU law, in particular the principle of fiscal neutrality, this being a matter which must be determined by the referring court.

National legislation under which close financial, economic and organisational links, within the meaning of the second subparagraph of Article 4(4) of Sixth Directive 77/388, can exist only where there is a relationship of control and subordination between the members of the VAT group is liable to be compatible with that article, on condition that it is necessary and proportionate to the pursuit of the objectives of preventing abusive practices and tax evasion or avoidance in compliance with EU law, in particular the principle of fiscal neutrality, this being a matter which must be determined by the referring court.

(3) A taxable person cannot rely directly on the second subparagraph of Article 4(4) of Sixth Directive 77/388. It is, however, for the referring court, as far as possible, to interpret its national legislation in conformity with that provision of the Sixth Directive.

Newsletters (after AG Opinion)

Internationaltaxplaza

Decision

1. Article 17(2) and (5) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 2006/69/EC of 24 July 2006, must be interpreted as meaning that:

– the expenditure connected with the acquisition of shareholdings in subsidiaries incurred by a holding company which involves itself in their management and which, on that basis, carries out an economic activity must be regarded as belonging to its general expenditure and the value added tax paid on that expenditure must, in principle, be deducted in full, unless certain output economic transactions are exempt from value added tax under Sixth Directive 77/388, as amended by Directive 2006/69, in which case the right to deduct should have effect only in accordance with the procedures laid down in Article 17(5) of that directive;

– the expenditure connected with the acquisition of shareholdings in subsidiaries incurred by a holding company which involves itself in the management only of some of those subsidiaries and which, with regard to the others, does not, by contrast, carry out an economic activity must be regarded as only partially belonging to its general expenditure, so that the value added tax paid on that expenditure may be deducted only in proportion to that which is inherent to the economic activity, according to the criteria for apportioning defined by the Member States, which when exercising that power, must have regard to the aims and broad logic of the Sixth Directive and, on that basis, provide for a method of calculation which objectively reflects the part of the input expenditure actually to be attributed, respectively, to economic and to non-economic activity, which it is for the national courts to establish.

2. The second subparagraph of Article 4(4) of Sixth Directive 77/388, as amended by Directive 2006/69, must be interpreted as precluding national legislation which reserves the right to form a value added tax group, as provided for in those provisions, solely to entities with legal personality and linked to the controlling company of that group in a relationship of subordination, except where those two requirements constitute measures which are appropriate and necessary in order to achieve the objectives seeking to prevent abusive practices or behaviour or to combat tax evasion or tax avoidance, which it is for the referring court to determine.

3. Article 4(4) of Sixth Directive 77/388, as amended by Directive 2006/69, may not be considered to have direct effect allowing taxable persons to claim the benefit thereof against their Member State in the event that that State’s legislation is not compatible with that provision and cannot be interpreted in a way compatible with it.

Personal comments/VATupdate

Source