On November 14, 2000. the ECJ issued its decision in the case C-142/99 (Floridienne and Berginvest).
Context: Sixth VAT Directive – Deduction of input tax – Undertaking subject to tax on only one part of its operations – Deductible proportion – Calculation – Holding company collecting share dividends and loan interest from its subsidiaries – Involvement in management of subsidiaries
Article in the EU VAT Directive
Article 19 of the Sixth VAt Directive (Article 174 of the EU VAT Directive 2006/112/EC)
Article 174
1. The deductible proportion shall be made up of a fraction comprising the following amounts:
(a) as numerator, the total amount, exclusive of VAT, of turnover per year attributable to transactions in respect of which VAT is deductible pursuant to Articles 168 and 169;
(b) as denominator, the total amount, exclusive of VAT, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which VAT is not deductible.
Member States may include in the denominator the amount of subsidies, other than those directly linked to the price of supplies of goods or services referred to in Article 73.
2. By way of derogation from paragraph 1, the following amounts shall be excluded from the calculation of the deductible proportion:
(a) the amount of turnover attributable to supplies of capital goods used by the taxable person for the purposes of his business;
(b) the amount of turnover attributable to incidental real estate and financial transactions;
(c) the amount of turnover attributable to the transactions specified in points (b) to (g) of Article 135(1) in so far as those transactions are incidental.
3. Where Member States exercise the option under Article 191 not to require adjustment in respect of capital goods, they may include disposals of capital goods in the calculation of the deductible proportion.
Facts
- The judgment making the reference explains that Floridienne, a holding company at the head of a group of companies operating in the chemicals, plastics and agri-foodstuffs sectors, and Berginvest, an intermediary holding company at the head of the plastics division, claim that they are directly or indirectly involved in the management of their subsidiaries, in particular by supplying them with administrative, accounting and information technology services and with loan finance. Furthermore, Floridienne and Berginvest receive dividends from their subsidiaries on their shares and interest on the loans.
- When they provide services to their subsidiaries, Floridienne and Berginvest carry out taxable transactions, in respect of which tax which has been imposed on goods and services supplied to them is deductible. Their practice of deducting the entirety of their input tax has been called into question by the Belgian tax authorities, in particular on the ground that some of the goods and services received are used in the collection of dividends and interest, an activity which the authorities consider to be exempt from VAT. Taking the view that the interest on the loans made by Floridienne and Berginvest to their subsidiaries relates nevertheless to a specific professional activity of a financial nature, the authorities reinstated it in the denominator of the fraction used to calculate the general deductible proportion. By contrast, as regards the dividends, only those paid by the subsidiaries which had actually received management assistance were included in the income reinstated in the denominator of that fraction.
- In those circumstances, the authorities issued payment orders with a view to recovering the VAT that they alleged was owed by the two companies in respect of transactions carried out between 1990 and 1994. Those orders were for a principal sum of BEF 13 812 839 in the case of Floridienne and BEF 17 598 876 in the case of Berginvest. Those companies brought proceedings to have the payment orders set aside, applying for their annulment and for damages for loss caused to them by the Belgian State.
- In the national court, Floridienne and Berginvest claimed, inter alia, that the system of deductions must be applicable only to transactions covered by the economic activity of the taxable person and that merely holding shares does not constitute a taxable activity. Moreover, no substantial resources were allocated by the companies to the collection of dividend income or interest from their subsidiaries. Collecting the dividend income produced by those shares does not therefore fall within the scope of VAT.
Questions
Must share dividends and interest on loans always be excluded from the denominator of the fraction used to calculate the deductible proportion, even where the company receiving such dividends and interest has involved itself in the management of the undertakings paying them, save in the exercise of its rights as shareholder?
AG Opinion
Share dividends should always be excluded from the denominator of the fractionused to calculate the deductible proportions laid down by Article 19(1) of the SixthCouncil Directive of 17 May 1977 on the harmonisation of the laws of the MemberStates relating to turnover taxes – Common system of value added tax: uniformbasis of assessment, where the economic relationship between the company owningthe shares and the company in which the shares are held is governed by lawfullyadopted legal arrangements including contracts for the provision of services and thenomination by a parent company of persons who carry out the activities of thesubsidiary. Furthermore, where one company in a group provides, even on acontinuing basis, loan finance to meet the regular borrowing needs of othercompanies in the same group, that activity does not constitute economic activityand the income from such finance should also be excluded from the denominatorof that fraction.
Decision
Article 19 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 – Common system of value added tax: uniform basis of assessment is to be interpreted as meaning that the following must be excluded from the denominator of the fraction used to calculate the deductible proportions:
– share dividends paid by its subsidiaries to a holding company which is a taxable person in respect of other activities and which supplies management services to those subsidiaries, and
– interest paid by the subsidiaries to the holding company on loans it has made to them, where the loan transactions do not constitute, for the purposes of Article 4(2) of the Sixth Directive, an economic activity of the holding company.
Summary
The following must be excluded from the denominator of the fraction used to calculate the pro rata for the purposes of the deduction:
– the dividends paid by subsidiaries to their holding company which is subject to VAT for other activities and which provides management services for these subsidiaries, and
– the interest which these subsidiaries pay to their holding company on loans granted to them by the latter, when those loans are not an economic activity of the holding company.
Source
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