VAT: Expenses related to the acquisition of shares

On July 16th 2015, the European Court of Justice delivered its judgement in the joined cases Larentia + Minerva (C-108/14) and Marenave (C-109/14) and extended its series of rulings on the deductibility of input VAT by holding companies.

This article only covers the input VAT deductibility question which was referred for a preliminary ruling. Two other questions were referred to the ECJ: (i) can a member State exclude partnerships from the VAT consolidation and may such a consolidation be limited to persons in a relationship of control and subordination and (ii) can a taxable person rely directly on the article of the VAT Directive providing for VAT consolidation.

Both German companies, Larentia + Minerva GmbH & Co. KG and Marenave Schiffahrts AG, held shares in subsidiaries to whom they rendered administrative services. Both companies were originally refused permission to deduct (at least part of) the input VAT related to expenses in relation with the raising of capital to fund the acquisition of their shareholdings. An action was brought before the German Bundesfinanzhof, which asked for a preliminary ruling.

The ECJ first recalled that, as opposed to the mere acquisition and holding of shares in a company, the involvement of a holding company in the management of companies in which it has acquired a participation constitutes an economic activity within the meaning of the VAT Directive.

On the main question, the ECJ then decided that holding companies, charging administrative and management services to their subsidiaries, should be allowed to fully deduct input VAT on costs related to the acquisition of shareholdings, except in cases where the services provided by said companies include VAT exempt supplies.

The Court further held that, in case a holding company provides management services to only some of its subsidiaries but not to all of them, input VAT should only be partially deductible. An allocation of the costs and input VAT incurred between:

  1. the economic activity of the company, being the holding of shares in subsidiaries to which VAT taxable services are rendered and
  2. the non-economic activity of mere holding of the shares in the remaining subsidiaries, to which no services are rendered, should be carried out according to specific criteria determined by the Member States but the method of calculation must objectively reflect the part of the services to be actually attributed respectively to the economic and non-economic activities.