Last week (ending 6/03/2022) no judgments and 1 opinion was issued. Below you will find a summary.

A holding company purchases services in order to transfer them as a contribution to a VAT exempted subsidiary – it cannot deduct VAT and it is an abuse of law

Finanzamt R (Déduction de TVA liée à une contribution d’associé), C-98/21, opinion, 3.03.2022

The German company W had 2 subsidiaries.

Those subsidiaries carried out construction projects consisting in the construction of buildings and sale of apartments. These sales were to be exempt from VAT.

W acquired certain services of considerable value relating to the construction of those buildings (general contractor services, cleanup, commercialization services, and statistical testing). It then contributed these services to the subsidiaries in return for a share in profits.

At the same time, it was agreed that W would provide accounting and management services to the subsidiaries for remuneration (subject to VAT).

W claimed that it has the right to deduct VAT on the services bought and contributed to the subsidiaries because these were its general costs.

The Advocate General addressed two issues in the opinion:

• In this situation, is the holding company entitled to deduct input VAT on those services acquired that were subsequently contributed to the subsidiary?
• Is there an abuse of law in this situation?

Concerning the first issue, the Advocate General concluded that there was no right of deduction

• In this case, W participated in the management of the subsidiaries because she performed management activities for consideration, which were subject to VAT.
• At the same time, however, she purchased services that were used to make a contribution to a partnership in order to receive a share of the profit.
• Making a contribution in order to obtain dividends is not the performance of a business activity.
• Therefore, there is no right to deduct input tax on such acquired goods and services.
• These acquisitions were not related to the activities of managing subsidiaries for consideration.
• Such acquisitions also do not constitute general costs of the holding company that would give the right to input VAT deduction.
• Acquisitions such as those in this case are distinct from the acquisition of consulting services related to the holding company’s acquisition of shares. This is because consulting services are necessary to the holding company’s business. However, this is not the case here.

As to the second issue, the Advocate General found that there was an abuse of law here

• W receives a tax advantage that is contrary to the purpose of the VAT rules (the purpose of VAT neutrality).
• This is because:
  – Indeed, if W had transferred goods and services for consideration, there would have been VAT due for payment that would not have been deducted by the subsidiaries.
  – If the companies formed a VAT group, the right to deduct would also be limited.
  o If W had contributed cash, the subsidiaries would not have been entitled to deduct input tax.
• In this case, the tax benefit is the primary, though not exclusive, purpose of the transaction.