Holdings: do failed investments and changes in use of inputs lead to correction of VAT deduction?

At the beginning of November, the Court of Justice of the European Union (CJEU) ruled in the case of a Portuguese holding company which intended to acquire another company, but the transaction did not ultimately materialise. The Court was dealing with whether the right to deduct VAT is maintained even if the investment failed, and whether the change in the actual use of the inputs affect the right to deduct VAT already claimed.

The case involved Portuguese holding company Sonaecom SGPS SA (C42/19), which planned to acquire a share in another company, a telecommunications operator. For this purpose, they purchased market research services, and also paid a commission to a bank for arranging a bond loan, the proceeds of which the holding company intended to use to purchase the mentioned share. The plan was to provide the company being acquired with management services subject to VAT, therefore the VAT on inputs was deducted in full.

In the end, the acquisition did not take place. The issue at dispute therefore was whether the right to deduct VAT already claimed shall be maintained even though the funds obtained through the bond loan were eventually used for a loan to the parent company.

The court first referred to the principles of VAT as regards holding companies: in particular, that a company whose sole purpose is to acquire shares in other companies without directly or indirectly participating in their management and providing them with no services does not have the status of a taxable person for VAT purposes; subsequently, such a company does not have the right to deduct VAT on its purchases. On the other hand, a company involved in the management of companies in which it has acquired ownership shares is a taxable person. Its right to deduct input VAT is then governed by the nature of the services provided: if they are services which are subject to output VAT or, in general, supplies upon whose provision the right to deduct the related input VAT is maintained, the company is entitled to deduct VAT on directly related inputs in full.

Furthermore, the court stated that a mixed holding company is a company which not only holds shares in companies, but provides services to some of those companies for consideration, which are subject to VAT. Such a company is thus a taxable person and entitled to deduct VAT on indirectly related costs, pro rata.

The court further stated that any economic activity also includes preparatory activities, and that each person who intends to pursue an economic activity independently must be regarded as a taxable person. The once arisen right to deduct is thus maintained even if the intended economic activity does not ultimately take place, for objective reasons.

If, due to a failed investment, the purchased inputs are used for a different purpose, the actual use of those inputs must be taken into account for VAT purposes. This means that it is necessary to assess whether the ultimate use of the inputs gives rise to the right to deduct VAT.

In the case in question, the Court thus ruled that a company whose involvement in the management of its subsidiaries is recurrent is entitled to deduct input VAT paid on the purchase of market research services even though the intended acquisition of a shareholding did not ultimately take place. At the same time, however,  the same company is not entitled to deduct input VAT on the commission paid to a credit institution in connection with the bond loan if the capital obtained through the bonds was paid in full to its parent company as a loan and such transaction constitutes a VAT exempt supply without the right to deduct.


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