The Finnish Supreme Administrative Court (SAC) issued two rulings on 15 September 2015 (SAC 2015:134 and SAC 2015:135) on the right to deduct input VAT on the acquisition of shares in a subsidiary. According to the decisions, in order to be able to deduct input VAT on the acquisition of shares in a subsidiary, a holding company needs to be actively involved in the management of its subsidiaries by selling services to these subsidiaries.
As a general rule, a company is considered to have deduction rights as of the moment it begins to make purchases for its taxable activities. Under the case law of the European Court of Justice, a holding company does not have VAT deduction rights if its sole purpose is to acquire shares in other companies without it being involved, directly or indirectly, in the management of these subsidiaries. This is however not the case when the holding is accompanied by direct or indirect involvement in the management of the companies in which the holding has been acquired. This question has recently been discussed by the ECJ in the combined cases Larentia + Minerva and Marenave (C-108/14 and C-109/14). According to the judgment referred to above, a holding company qualifies as a taxable person carrying out economic activity if it is involved in the management of its subsidiaries by providing taxable services to these subsidiaries. The ECJ considered that expenditure connected with the acquisition of shareholdings has a direct and immediate link with the taxable person’s economic activity as a whole, and it must be regarded as belonging to its general expenditure. Consequently, the VAT paid on that expenditure must, in principle, be deducted in full unless some of the transactions are exempt from VAT.
In both decisions, SAC 2015:134 and SAC 2015:135, the SAC referred to the judgment in the cases of Larentia + Minerva and Marenave. In the SAC cases, the respective holding companies acquired the shares of a new subsidiary. In SAC 2015:134, the holding company was in charge of the group’s IT solutions and charged its parent company for the taxable services provided to its subsidiaries, whereas in SAC 2015:135 the holding company did not take any part in the management of its subsidiaries at the time of the acquisition. In SAC 2015:134 the SAC ruled that the input VAT related to the acquisition of shares was fully deductible. According to the SAC, the transaction costs were to be considered general expenditure related to the holding company’s taxable activities as a whole. However, due to the fact that the holding company in SAC 2015:135 did not have taxable activities at the time of the acquisition, the SAC ruled that the holding company was not allowed to deduct any input VAT related to its respective transaction costs even if it commenced the provision of management services later on.
Since the VAT deduction rights of holding companies have been subject to the scrutiny of tax authorities in recent tax audits, and in case of acquisitions of shareholdings as well, the decisions are considered to clarify the situation. In particular, the case makes clear that the status of a holding company as such, or the dividends and group contributions received from the subsidiaries, does not impact the deductibility of input VAT incurred on general expenditure. However, in future, the VAT deductibility of transaction costs should also be carefully considered when structuring acquisitions.