VAT recovery for Holding Companies

European Court rules on whether holding companies can reclaim VAT on costs where no management fees are charged.


The Court of Justice of the EU (CJEU) has issued an Order in the Hungarian case of MVM Magyar Villamos Művek Zrt (MVM). The case considers whether a holding company, which is actively involved in the management of its subsidiaries and carries on a taxable business activity in its own right, is entitled to deduct VAT incurred on those management costs, where no charge was made to the subsidiaries for its services.

The CJEU concluded that as MVM received no remuneration from its subsidiaries, the management of its subsidiaries could not be regarded as an economic/business activity and MVM did not have the right to deduct the VAT on associated costs. The CJEU clarified that, in line with settled case law, a taxable person may have a right to deduct VAT on costs even where there is no direct and immediate link between a particular input transaction and an output transaction, where those costs have a direct and immediate link with the taxable person’s business activity as a whole. However, the CJEU considered that no such link existed in the current case. The CJEU also suggested that if it was wrong on the latter point and the referring court determined that the services at issue did relate to the business activity of the group as a whole, consideration would need to be given to whether business and non-business activities were undertaken by the group and if so, an appropriate method of apportionment would be necessary to determine the amount of recoverable VAT.

The CJEU’s decision is a reminder that holding companies engaged in the management of subsidiaries should, wherever possible, charge for those management services. Whether inter-company accruals may be acceptable as evidence of a ‘charge’ is yet to be tested. Holding companies which have not charged for management services provided to subsidiaries may wish to review the position.

 

Written by Samantha Snow, Client Services Director