European court issues preliminary ruling on Holding Companies

On January 12, 2017 The European Court of Justice (C-28-16) decided on a request for a preliminary ruling on Holding Companies.

The questions raised were:

May a holding company which plays an active role in the management of certain affairs of its subsidiaries, or of the group of companies as a whole, but which neither invoices its subsidiaries the cost of the services carried out in relation to its active holding activity nor the corresponding VAT, be regarded as a taxable person for the purpose of VAT in respect of those services? And is this holding entitled to deduct VAT on the costs related to its active management role?

The Court decided that:

“in so far as the involvement of a holding company, such as that at issue in the main proceedings, in the management of its subsidiaries, where it has charged those subsidiaries neither for the cost of the services procured in the interest of the group of companies as a whole or in the interest of certain of its subsidiaries, nor for the corresponding VAT, does not constitute an ‘economic activity’, within the meaning of the directive 2006/112/EC, such a holding company does not have the right to deduct input VAT paid in respect of those services in so far as those services relate to transactions falling outside the scope of that directive.”

Summary

A holding company has to recharge costs of management activities in order to be entitled to deduct input VAT paid in respect of those services to its subsidiaries.

We expect the current Dutch decree on holding companies – the so called ‘holding resolutie’ 18 February 1991, VB 91/347 – to be amended. This decree approves a holding company that plays an active role in the management of its subsidiaries - can be part of a VAT fiscal entity with its subsidiaries - will be amended.