A recent opinion from the European Courts – if ratified – will affect the recovery of VAT on corporate finance deals and other holding company costs.
It could also change the rules on membership of a VAT group registration.
The Advocate General (AG) of the Court of Justice of the European Union (CJEU) has recently issued an opinion in a case concerning two limited partnerships that acquired shareholdings in subsidiaries.
In the joined cases of Larentia + Minerva mbH & Co. KG and Marenave Schiffahrt AG (Larentia + Minerva), referred to the CJEU by Germany, the AG’s opinion dealt with two issues:
- Whether the partnerships were entitled to recover VAT on acquisition costs, and
- Whether partnerships were eligible to join a VAT group registration.
The issue at stake in these joined cases is the extent to which input tax on costs of a holding company, incurred in connection with the raising of capital, has a “direct and immediate” link to the economic activity of the holding company where the company actively manages its subsidiaries, and is therefore recoverable.
In each case, a German holding company held shares in limited partnership subsidiaries.
The holding company provided administrative and business services to its subsidiaries for remuneration. The holding company in each case sought to recover input tax incurred in raising capital to fund the acquisition of the subsidiaries.
If the AG’s opinion is followed by the ECJ then there will be clear authority that holding companies who actively manage their subsidiaries will be entitled to full recovery of input tax on capital transactions that relate to those subsidiaries.
In the UK, this issue has been the subject of a long-running dispute between taxpayers and HMRC. HMRC’s detailed guidance on VAT recovery by holding companies, issued last September, set the bar very high.
But HMRC has pledged to review its policy once Larentia + Minerva has been fully decided. Most UK appeals on this issue have since been based on this case.
The opinion is very positive for the taxpayer as it states clearly that (in principle) VAT is recoverable on capital transactions.
Haslers provides a dedicated VAT service, for businesses and other professional advisers. To find out more, please contact us.