Although for many years holding companies saw their, arguably, right to deduct input Value Added Tax, hereinafter VAT, being rejected by the tax authorities, the Court of Justice of the European Union, hereinafter CJEU, issued over time several decisions which allowed a slow, but unequivocal, change of paradigm for the so-called active or mixed holdings (e.g., holding companies which are directly or indirectly involved in the management of its subsidiaries, providing to them taxable services for consideration).
Taking these decisions into account, the Portuguese arbitral decision held in case number 77/2012-T constituted a landmark in Portugal as it analyzed the piecemeal guidance given until then by the CJEU for several purposes in several decisions, and merged them together in an innovative approach which was also adopted by the CJEU itself a few years later. And which since then has been continuously reinforced by this Court.
II. The piecemeal evolution of the CJEU’s case law towards the protection of the input VAT deduction right for active and mixed holding companies
The point of departure for the CJEU with respect to holding companies is that the acquisition and holding of shares in companies in itself is not deemed to qualify as an economic activity for VAT purposes. Thus, bearing in mind that the right to deduct input VAT relies on the principle that the goods and services into question should be used within the context of VAT taxable transactions carried out by a taxable person (or entity), that stance of the CJEU prevented pure holding companies from being considered as taxable persons for VAT purposes and consequently prevented them from deducting any input VAT at all.
Notwithstanding the above, the CJEU has adopted a different position for active and mixed holding companies in cases where there is an immediate and direct link between the input VAT and the economic activity of the company.
The CJEU first recognized that whenever the holding company interferes directly or indirectly in the management of its subsidiaries (Polysar – C-60/90) and such interference implies the execution of taxable transactions, namely the supply of services for consideration (Floridienne – C142/99), the CJEU considers that there is an underlying economic activity thus qualifying such holdings as taxable persons for VAT purposes.
Furthermore, the CJEU has acknowledged that a company is entitled to deduct the input VAT deriving from general expenses to the extent that such expenses are a component of the cost of the taxable operations ultimately performed by the holding itself (BLP – C-4/94). The CJEU has also considered that the right to deduct input VAT prevails even when the projected economic activity does not result in taxable operations or when the taxable person is not able to use the input goods or services within taxable operations, for reasons beyond the control of such taxable person (Midland Bank, C-98/98). In another CJUE case it was decided that even when a taxable person carries out simultaneously operations which give rise to the right to deduct input VAT and operations which do not give rise to such right, the VAT borne with general expenditure may be entirely deducted if such expenditure is linked to the part of the economic activity as a whole comprised of the operations that give rise to the right to deduct input VAT (Abbey National, case C-408/98).
In yet another relevant angle for holding companies, as per the understanding of the CJEU the receipt of dividends does not fall within the scope of VAT, thus not affecting the VAT deduction pro rata (Sofitam/Satam, case C-333/91).
In Cibo (case C-16/00), the CJEU ruled that, notwithstanding the fact that there is no direct and immediate link between the various services purchased by a company in connection with the acquisition of a shareholding in a subsidiary and any output transactions in respect of which VAT is deductible, the costs of those services are deemed to be part of the general expenditure and, as such, have a direct link with the whole of the economic activity. Therefore VAT on those services is deductible in proportion to the operations giving rise to the right to deduct input VAT.
With respect to interest deriving from loans granted by an holding to its subsidiaries, the CJEU has ruled that the loans operations may be deemed of an ancillary nature if such operations imply a minor expense of resources or consumptions burdened with VAT, thus preventing the interest from influencing negatively the right to deduct input tax (EDM, case C-77/01, a Portuguese case).
As a reflection of the CJEU’s position in defense of the right to deduct input VAT, it has determined that, notwithstanding the fact that certain expenses burdened with VAT may be related to an operation which is not in itself subject to VAT or which is simply out of the scope of the VAT, it is still possible to conclude that such expenses have an immediate and direct link with the whole of the economic activity of the taxpayer. Thus being the corresponding VAT deducted in proportion to the part of such economic activity corresponding to the operations which grant a right to deduct VAT (Kretztechnik, case C-465/03 and AB SKF, case C-29/08).
In 2012, the CJEU issued an important decision related to a holding company (Portugal Telecom SGPS, case C-496/11, another Portuguese case) in which it sustained, in an implicit application of the effective allocation method (as opposed to the pro rata method), that the holding was allowed to fully deduct the input VAT of acquired services (consulting services in this case) used for the purpose of operations bearing a right to deduct VAT (rendering of technical management and administration services to its subsidiaries, in this case – services of an ancillary nature). This full deduction right had been previously denied by the Portuguese tax Authorities (PTA hereinafter) based on the understanding that the pro rata method applied. The CJEU ruled also that the right to deduct input VAT cannot be restricted by the fact that the operations burdened with such input tax are merely ancillary. Once again, the CJEU ruled against the restriction of the right to deduct VAT emphasizing that the only relevant aspect for this purpose is the existence of a direct and immediate link between the input and the output transactions.
III. The innovative mindset of the arbitral decision n. º 77/2012, and many others that followed.
The arbitral decision n. º 77/2012 is a landmark in Portugal on this issue, as it selects the relevant reasonings behind each previous CJEU decisions yielded throughout decades of labour, and assembles them as if each decision individually considered were a small part of a bigger jigsaw puzzle.
Firstly, based on case C-496/11 (Portugal Telecom SGPS), the arbitral court recognized that should the resources of the holding company be used within the context of activities which grant the right to deduct input VAT, the input tax is deductible regardless of the relative weight of the value generated by such activities within the total proceeds of the company. In addition, the arbitral court considered that the holding company into question was allowed to deduct all the input VAT related to services and goods acquired which have an immediate and direct link with the services rendered by such holding company to its subsidiaries granting the right to deduct VAT. And even if not immediately and directly linked to such services, can be deducted VAT of general expenditures with an immediate and direct link to the holding company’s economic activity as a whole.
With respect to the expenses incurred by the holding company with the liquidation of a subsidiary, the arbitral court has concluded, based on the CJEU decision in case C-408/98 (Abbey National), that the input VAT should be deducted as they were deemed expenses related to the economic activity as a whole, of the company. As for the expenses for the development of the holding business abroad, they were considered a general expenditure with repercussions in the prices charged by the holding company for the services rendered to its subsidiaries.
Finally, based in case C-77/01 (EDM), the arbitral court considered that due to the ancillary nature of the activity of granting loans to its subsidiaries, the related interest received on those loans should not be relevant for the calculation of the percentage of deductible VAT.
The CJEU reached the same unequivocal conclusion on this subject, assembling the dispersed pieces of the same jigsaw, in cases C-108/14 (Larentia+Minerva) and C-109/14 (Marenave). Therein it concluded that active holdings are entitled to a full deduction of input VAT (including VAT in costs related to the acquisition of subsidiaries in relation to which the holding performs an economic activity), unless and to the extent the holding performs, in addition to the services rendered to its subsidiaries, other economic operations, VAT exempt, which do not grant the right to deduct VAT. Other CJUE decisions followed, confirming this reasoning: C-28/16 (MVM Magyar), in which no right of deduction was upheld only because the services rendered do the subsidiaries were free of charge, C-320/17 (Marle Participations) and C-249/17 (Ryanair Ltd).