Holding Companies - The VAT Challenge

This article was first published in ITR supplemental 8th Edition (Tax reference Library n°55).

Strategic holding companies are common features in global commercial and industrial organizations and are used tactically in M&A. Private equity houses also use holding companies extensively in the context of their transactions. In the absence of efficient service flows structuring, all these players are very likely to suffer significant VAT costs.

This article will review the developments of the VAT jurisprudence in this area and identify risks and opportunities deriving from the evolution of this jurisprudence. Indeed, the VAT concepts applicable to the holding companies have been evolving significantly in recent years and may seem quite complicated at the first sight. Attention must however be paid to the flows of services and their implications in the light of the VAT legislation. Indeed, inadequate structuring leads to VAT costs - VAT itself with rates ranging between 15% to 25% in the European Union - but also time-consuming administrative obligations.

A holding company is usually defined as being a company which owns shares in one or several companies in order to control them. It is not required to use a special legal form of company.

In a case relating to direct taxes, the European Court of Justice ("ECJ") confirmed this view and specified that "the holding company's business consists wholly or mainly in the holding of shares in subsidiaries1".

The purpose of holding companies is easy to define and understand. There are different types of holding companies, with different implications in the field of VAT:

Pure holding companies which have for sole activity the mere holding of shares; Mixed holding companies which, in addition to holding of shares, perform additional activities such as financing activities or supply of services. Considering the large scope of activities performed by holding companies and difficulties in interpreting traditional VAT concepts, there have been many cases brought to court for many years., This jurisprudence is in particular relating to the status of taxable person and the right to deduct input VAT.

1. The qualification of taxable person

   In accordance with article 9 of Directive 2006/112/CE, "is considered as a taxable person, any person who independently carries out in any place any economic activity, whatever the purpose or results of that activity".

   Economic activities are defined in the VAT legislation as encompassing all activities of producers, traders and persons supplying services, including"the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis".

   The interpretation of this definition does not raise issues in a majority of sectors where companies perform commercial and industrial activities. The determination of the VAT status of holding companies is however more difficult. In effect, the activities performed by a holding company need to be analysed to determine if they qualify as economic activities falling within the scope of VAT.

   Are holding companies taxable persons for VAT purposes?

   As stated above, holding companies can be divided into two main types (i.e. pure holding companies or mixed holding companies). The ECJ had the chance to give its interpretation several times on the qualification as taxable person of both types of holding companies.

   1. Pure holding companies The ECJ gave in first instance its opinion regarding the status of pure holding companies. The Court analyzed whether the income arising from the mere holding of shares could be qualified as a consideration for an economic activity falling within the scope of VAT.

      The ECJ2 stated that "a holding company whose sole purpose is to acquire holdings in other undertakings, without involving itself directly or indirectly in the management of those undertakings, without prejudice to its right as shareholder, does not have the status of taxable person for the purposes of VAT."

      The ECJ considered that to be characterized as economic, the income should exist on a permanent basis. However, as dividends are paid on basis of the holding of a share and, as dividends depend on the performance of a subsidiary, the remuneration resulting from the holding of shares is uncertain. Therefore, the ECJ considered that the mere acquisition and holding of shares in a company is not to be regarded as an economic activity conferring on the holder the status of a taxable person for VAT purposes. The mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefrom on a continuing basis because any dividend yielded by that holding...