CJEU again on right to deduct VAT in context of holding companies

The case concerned a German parent company engaged in the purchase, management, and sale of real estate and other activities. The company also held a share in two subsidiaries. By an addendum to the memorandum of association, the subsidiaries agreed that the parent company would provide them with a shareholder’s contribution, comprising a free-of-charge provision of accounting and management services in favour of the subsidiaries. The subsidiaries largely carried out exempt transactions without the right to deduct.

In its tax returns, the parent company deducted input VAT on its purchases of the services provided to the subsidiaries. The German tax authority then challenged the right to deduct.

The CJEU first confirmed the previous case law: mixed holding companies that are involved in the operation of their subsidiaries (e.g., in the form of the provision of various services) carry out an economic activity as taxable persons. According to the CJEU, the right to deduct tax can then also be granted for overhead costs if they are reflected in the price of supplies provided by the holding company.

In the present case, however, the court found that the services provided by the parent company had been purchased by it to make a shareholder’s contribution. Such contributions generally fall under the holding of shares, which does not constitute an economic activity for VAT purposes. Furthermore, the costs of the services were not reflected by the parent company in the price of the taxable supplies provided to the subsidiaries. The CJEU thus challenged the link between the cost of the services purchased by the parent company and its economic activity and did not recognise the right to deduct VAT on the received services in question.