Changes to the right to deduct VAT when your company holds shares?

7 february 2017 - Does your business have shares in subsidiaries? Remember that the right to deduct VAT can be of concern. Recently, the European Court of Justice issued a ruling explaining the right to deduct VAT if a company, apart from performing VAT taxable activities, also holds shares in subsidiaries.

In this case, the Court ruling concerned a Hungarian company that carried out VAT taxable activities. The company also had a number of subsidiaries. Although the company was responsible for the strategic management of these subsidiaries and carried out legal and marketing services, it did not charge a fee to the subsidiaries. The company did not pass on costs to the subsidiaries either, even though those costs pertained to those companies. In its VAT returns, the company reclaimed all the input VAT incurred on costs, which was noted during an audit. The Hungarian Tax Authorities did not accept the VAT deduction and issued VAT assessments. During the subsequent legal proceedings, the highest court in Hungary was in doubt and submitted questions to the European Court of Justice.

Ruling

In its ruling, the European Court of Justice repeated previous case law outlining that a company can only deduct input VAT incurred if the costs directly and immediately relate to  VAT taxable activities. When a company performs services for its subsidiary without charging a fee, in general no VAT taxable activity can be considered and therefore there is no right to deduct the VAT on related costs. The situation would change if the costs of the services performed were to be expressed in the price the company charges for its VAT taxable activities. This will have to be considered on a case by case basis.

In Dutch practice, the allocation of costs incurred for activities that are subject to VAT or not, always gets special attention from the Dutch Tax authorities. It is however not always easy to come to a correct allocation. Therefore it is recommended to reach practical agreement with the Dutch tax authorities.

More information?

Would you like to know more about your VAT position? Or if you wish to reach clear agreements with the Dutch tax authorities on the VAT position of holding companies in your group? Please contact Eline Polak, Partner VAT & Customs of Mazars by e-mail  or by phone +31 (0)88 277 23 25.

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