Holding, Financing, Deductions and VAT Alexis Tsielepis Managing - - PowerPoint PPT Presentation

Holding, Financing, Deductions and VAT

Alexis Tsielepis Managing Director, Chelco VAT Ltd Panayiotis Panayi Director, Chelco VAT Ltd

Wednesday, 23 January 2019 Columbia Plaza Limassol

The Legislation

4

The Legislation

• VAT Directive: Council Directive 2006/112/EC of 28

November on the common system of value added tax (from 1 Jan 2007)

5

The Legislation

• VAT Directive: Article 2(1)

The following transactions shall be subject to VAT: (a) the supply of goods for consideration by a taxable person; (b) the intra-Community acquisition of goods for consideration by a taxable person; (c) the supply of services for consideration by a taxable person; (d) the importation of goods.

6

The Legislation

• VAT Directive: Article 9(1) Definition of taxable person:

any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.

7

The Legislation

• VAT Directive: Article 9(1) Definition of taxable person:

«economic activity» shall be regarded as any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose

• f obtaining income therefrom on a continuing basis shall in

particular be regarded as an economic activity.

Holding Companies

The case of Polysar ECJ, Case C-60/90 [1991]

9

The case of Polysar

• There are no specific provisions for holding companies in the VAT

legislation

• Main issues are whether a holding company is a Taxable Person and

what the VAT treatment is for the deduction of input VAT on expenses

• This can only be examined through the jurisprudence of the

European Court of Justice (ECJ)

• The main such decision is that of Polysar, ECJ, Case C-60/90 [1991]

10

The case of Polysar

• Polysar BV forms part of the world-wide Polysar group. It holds

shares in various foreign companies that are active in the area of the production and sale of synthetic kaoutsouk and related products.

• Polysar BV receives dividends each year and regularly pays out

dividends to Polysar Holding Ltd, established in Canada, which holds 100% of Polysar’s BV share capital. It does not itself engage in trading activities.

• Polysar BV claimed and received the input VAT for various services

rendered to it. The Dutch VAT Authorities issued an assessment for the recovery of the amount refunded.

11

The case of Polysar

• The Dutch Court referred the following question to the ECJ for a

preliminary ruling: whether a holding company, whose activities are concerned solely with the holding of shares in subsidiary companies, be regarded as a taxable person, i.e. whether it has economic activities

12

The case of Polysar

• The ECJ decided:

13 It does not follow from that judgment, however, that the mere acquisition and holding of shares in a company is to be regarded as an economic activity, […], conferring on the holder the status of a taxable

• person. The mere acquisition of financial holdings in other undertakings

does not amount to the exploitation of property for the purpose of

• btaining income therefrom on a continuing basis because any dividend

yielded by that holding is merely the result of ownership of the property. 14 It is otherwise where the holding is accompanied by direct or indirect involvement in the management of the companies in which the holding has been acquired, without prejudice to the rights held by the holding company as shareholder.

The Legislation

The importance of consideration

14

The importance of Consideration

• ECJ, Case Hong Kong Trade Development, C-89/81 [1982]
• The Hong-Kong Trade Development Council was an organisation

founded in Hong Kong in 1966, with the object of promoting trade between Hong Kong and other countries.

• It opened offices in various important trade centres, including an
• ffice in Amsterdam in 1972.

15

The importance of Consideration

• ECJ, Case C-89/81, Hong Kong Trade Development
• The Amsterdam office provided traders with information and

advice about Hong Kong and the opportunities for trade with Hong Kong, as well as similar information concerning the European market to Hong Kong traders; and all were provided free of charge.

16

The importance of Consideration

• ECJ, Case C-89/81, Hong Kong Trade Development
• Initially, the Amsterdam office was recognised as a taxable person

for VAT purposes, and received refunds of input VAT on goods and services supplied to it. Later on, the Dutch VAT Authorities ceased to regard it as a taxable person and reclaimed the refunded amounts.

• The main question referred by the Dutch court to the ECJ was

«whether a person who habitually provides services for traders, be regarded as a taxable person when those services are being provided free of charge».

17

The importance of Consideration

• ECJ, Case C-89/81, Hong Kong Trade Development
• ECJ: Where a person’s activity consists exclusively in providing

services for no direct consideration, there is no basis of assessment and the free services in question are therefore not subject to VAT.

• In such circumstances, the person providing the services must be

assimilated to a final consumer, because he is at the final stage of the production and distribution chain.

Holding Companies

Dividends receivable

19

Dividends receivable

• Sofitam, ECJ, Case C-333/91 [1993]
• Sofitam (formerly Satam), a holding company, deducted, from the VAT

which it was liable to pay, the whole of the VAT charged on the goods and services which it had acquired during the same tax period.

• It received trading income as well as dividend income, but did not

involve itself in the management of its undertakings.

20

Dividends receivable

• Sofitam, ECJ, Case C-333/91 [1993]
• Having established that the revenue received by Sofitam included, on the
• ne hand, various proceeds subject to VAT and, on the other hand,

dividends not subject to VAT, the French tax authority took the view that under the General Tax Code, Sofitam should have deducted VAT on goods and services acquired by it only up to the percentage resulting from the ratio between the amount of its taxable receipts and the annual amount of its total receipts, including the dividends which it had received.

21

Dividends receivable

• Sofitam, ECJ, Case C-333/91 [1993]
• Sofitam objected to that claim and argued that the total annual amount

to be included in the denominator included only sums received by the taxable person in respect of the performance of transactions subject to VAT or expressly exempt from VAT, to the exclusion of income such as dividends, which did not relate to any activity giving rise to turnover and did not fall within the scope of VAT.

22

Dividends receivable

• Sofitam, ECJ, Case C-333/91 [1993]
• ECJ: the mere acquisition of financial holdings in other companies does

not constitute an economic activity within the meaning of the directive and therefore offers no right of deduction (Polysar).

• the receipt of dividends is not the consideration for any economic

activity, so it does not fall within the scope of VAT. Consequently, dividends resulting from holdings fall outside the deduction entitlement.

• Consequently, dividends must be excluded from the calculation of the

deductible proportion, if the objective of wholly neutral taxation ensured by the common system of VAT is not to be jeopardized.

Holding Companies

Definition: Direct or indirect involvement in the management

24

Direct or indirect involvement in the management

• Floridienne and Berginvest, ECJ, Case C-142/99 [2000]
• Floridienne was a holding company at the head of a group of companies
• perating in the chemicals, plastics and agri-foodstuffs sectors, and

Berginvest, was an intermediary holding company at the head of the plastics division.

• Aside from the holding of shares, F&B were directly or indirectly involved

in the management of their subsidiaries, in particular by supplying them, for consideration, with administrative, accounting and information technology services and with loan finance.

25

Direct or indirect involvement in the management

• Floridienne and Berginvest, ECJ, Case C-142/99 [2000]
• In addition, F&B, provided loans to some of their subsidiary companies,

but not all. Consequently, they received dividend and interest income.

• F&B deducted the entirety of their input VAT with respect to goods and

services supplied to them.

26

Direct or indirect involvement in the management

• Floridienne and Berginvest, ECJ, Case C-142/99 [2000]
• Their practice of deducting the entirety of their input tax has been called

into question by the Belgian tax authorities, in particular on the ground that some of the goods and services received are used in the collection

• f dividends and interest, an activity which the authorities consider to be

exempt from VAT.

• The Belgium tax authorities concluded that the deduction could only be

made pro-rata.

27

Direct or indirect involvement in the management

• Floridienne and Berginvest, ECJ, Case C-142/99 [2000]
• Taking the view that the interest on the loans made by F&B to their

subsidiaries relates nevertheless to a specific professional activity of a financial nature, the authorities reinstated it in the denominator of the fraction used to calculate the general deductible proportion.

• By contrast, as regards the dividends, only those paid by the subsidiaries

which had actually received management assistance were included in the income reinstated in the denominator of that fraction.

28

Direct or indirect involvement in the management

• Floridienne and Berginvest, ECJ, Case C-142/99 [2000]
• ECJ: the direct or indirect involvement in the management of the

subsidiaries must be regarded as an economic activity, in so far as it entails carrying out transactions which are subject to VAT, such as the supply by F&B of administrative, accounting and information technology services to their subsidiaries.

• the receipt of dividends is not the consideration for any economic

activity and it does not fall within the scope of VAT - dividends resulting from shareholding fall outside the deduction entitlement

29

Direct or indirect involvement in the management

• Floridienne and Berginvest, ECJ, Case C-142/99 [2000]
• ECJ: Certain features of dividends account, in particular, for their

exclusion from VAT: 1) First, the existence of distributable profits is generally a prerequisite of paying a dividend and that payment is thus dependent on the company's year-end results. 2) Second, the proportions in which the dividend is distributed are determined by reference to the type of shares held, in particular by reference to classes of shares, and not by reference to the identity of the owner of a particular shareholding. 3) Lastly, dividends represent, by their very nature, the return on investment in a company and are merely the result of ownership of that property

30

Direct or indirect involvement in the management

• Floridienne and Berginvest, ECJ, Case C-142/99 [2000]
• ECJ: with regards to the loans, F&B merely re-invested the dividends they

had received from their subsidiaries in the form of loans, to some of them, without any connection to the administration services supplied.

• where a holding company merely reinvests dividends received from its

subsidiaries and outside the scope of VAT in loans to those subsidiaries, that in no way constitutes a taxable activity. The interest on such loans must, on the contrary, be considered merely as the result of ownership

• f the asset and is therefore outside the system of deductions.

31

Direct or indirect involvement in the management

• Welthgrove, ECJ, Case C-102/00 [2001]
• Welthgrove is an intermediate holding company which holds shares in a

number of companies established in the European Union manufacturing plastic packaging.

• Welthgrove employed no staff. The members of its board of directors

engaged in the active guidance of its subsidiaries, but Welthgrove charged no remuneration for those activities, although it received dividends from its subsidiaries.

• Welthgrove deducted input VAT on supplies it received, with the Dutch

administration believing it had no such right as it was not a taxable person

32

Direct or indirect involvement in the management

• Welthgrove, ECJ, Case C-102/00
• Welthgrove’s position was that it was involved in the management of its

subsidiaries, within the terms of the judgment of Polysar, and therefore had a right to deduct input VAT.

• ECJ: The mere acquisition of financial holdings in other undertakings

does not amount to the exploitation of property for the purpose of

• btaining income therefrom on a continuing basis because any dividend

yielded by that holding is merely the result of ownership of the property

• the mere involvement of a holding company in the management of its

subsidiaries without carrying out transactions subject to VAT cannot be regarded as an economic activity

Shares vs Bonds

The case of Harnas & Helm

34

Shares vs Bonds

• Harnas & Helm, ECJ, Case C-80/95 [1997]
• 1/1/87-1/3/91: Harnas, established in Amsterdam, held shares and

bonds issued by bodies and undertakings in the United States of America and Canada. During this period, Harnas received dividends or interest on those shares and bonds.

• 1984-16/4/87: Harnas made a loan to the undertaking All American

Metals.

• 1/7/1992: Harnas made a loan to another borrower, Opticast

International Corporation.

35

Shares vs Bonds

• Harnas & Helm, ECJ, Case C-80/95 [1997]
• The Dutch tax inspector, considering that, as from 17 April 1987, Harnas

could not be regarded as a trader, issued a reassessment notice to recover the amount of the VAT which Harnas had deducted in respect of the period between 17 April 1987 and 1 March 1991 inclusive.

• The Dutch VAT administration believed that during this period, Harnas

did not exercise any economic activity.

36

Shares vs Bonds

• Harnas & Helm, ECJ, Case C-80/95 [1997]
• ECJ: the Court cited its case-law that had specified that:
• the mere acquisition and holding of shares in a company is not to be

regarded as an economic activity, conferring on the holder the status of a taxable person (Polysar).

• the mere acquisition of financial holdings in other undertakings does not

amount to the exploitation of property for the purpose of obtaining income therefrom on a continuing basis because any dividend yielded by that holding is merely the result of ownership of the property (Sofitam).

37

Shares vs Bonds

• Harnas & Helm, ECJ, Case C-80/95 [1997]
• ECJ: the activity of a bondholder may be defined as a form of investment

which does not extend further than straightforward asset management.

• The income from the bonds derives from the mere fact of holding them,

which entitles the holder to payments of interest.

• Such interest cannot, therefore, be regarded as a return on an economic

activity or transaction carried out by the bondholder, since it derives from the mere ownership of the bonds.

38

Shares vs Bonds

• Harnas & Helm, ECJ, Case C-80/95 [1997]
• ECJ: There is thus no reason to treat bondholding differently from

shareholding.

• As such, the mere acquisition of ownership in and the holding of bonds,

activities which are not subservient to any other business activity, and the receipt of income therefrom are not to be regarded as economic activities conferring on the person concerned the status of a taxable person.

Economic vs Non-Economic Activity

The cases of Larentia + Minerva and Marle Participation

40

Economic vs non-economic activity

• Larentia + Minerva, ECJ, Case C-108/14 [2015]
• Larentia + Minerva holds, as a limited partner, 98% of the shares in two

subsidiaries and also provides those subsidiaries, as a ‘management holding company’, with administrative and business services for remuneration.

• In respect of those services subject to VAT, Larentia + Minerva deducted

in full the input VAT paid in procuring capital from a third party which was used to fund the acquisition of its shareholdings in the subsidiaries and its services, in particular administrative and consultancy services

• The Finanzamt Nordenham allowed that deduction only in part, since the

mere holding of shares in the subsidiaries does not, according to that body, give a right to deduction.

41

Economic vs non-economic activity

• Larentia + Minerva, ECJ, Case C-108/14 [2015]
• ECJ: The court’s thinking was as follows:

– The supply of management services for consideration to subsidiaries constitutes an economic activity – For VAT to be deductible, the input transactions must have a direct and immediate link with the output transactions giving rise to a right

• f deduction, or the costs of the services in question are part of his

general costs and are, as such, components of the price of the goods

• r services which he supplies

42

Economic vs non-economic activity

• Larentia + Minerva, ECJ, Case C-108/14 [2015]
• ECJ: (continuation)
• the expenditure connected with the acquisition of shareholdings in

subsidiaries incurred by a holding company which involves itself in their management and which, on that basis, carries out an economic activity, must be regarded as attributed to that company’s economic activity and the VAT paid on that expenditure gives rise to the right to full deduction.

• in the event that the shareholdings resulting from the capital

transactions carried out by the holding companies were attributed in part to other subsidiaries in the management of which those holding companies were not involved that the VAT paid on the costs of those

• perations could be deducted only in part.

43

Economic vs non-economic activity

• Marle Participations, ECJ, Case C-320/17 [2018]
• Marle Participations is the holding company in the Marle Group. It held

shares in subsidiary companies and also leased a building to some of them.

• It conducted a restructuring of its holding operations making sales and

acquisitions of subsidiaries. It deducted the VAT charged on various expenses to do with the restructuring in full.

• The French Tax Authorities denied the VAT deduction saying it related to

a capital transaction which fell outside the scope of the right of deduction.

• The French Court referred to the ECJ whether the leasing to the

subsidiary could constitute ‘involvement in its management’

44

Economic vs non-economic activity

• Marle Participations, ECJ, Case C-320/17 [2018]
• ECJ:
• The leasing of a building to a subsidiary is considered involvement in the

management of the subsidiary if the rent is subject to VAT (not exempt). Therefore to the extent that a subsidiary was leasing with VAT from the parent, the VAT on restructuring expenses could be deducted, based on Larentia + Minerva principal.

• The ECJ went further and clarified that the term ‘involvement of a

holding company in the management of its subsidiary’ must accordingly, be understood as covering all transactions constituting an economic activity, within the meaning of the VAT Directive, performed by the holding company for the benefit of the subsidiary.

45

Economic vs non-economic activity

• Marle Participations, ECJ, Case C-320/17 [2018]
• ECJ:
• The ECJ also clarified that the deduction should be granted regardless of

the amount of the rental income, i.e. even if there is a disparity between the benefit of the VAT deduction and the VAT chargeable on the rental income amount.

• It justified this decision based on the fact that the right to deduct may

not be linked to the results of the economic activity.

Holding Companies & VAT

Interpretive Circular 222 09.01.2018

47

Circular 222

• On 09.01.2018, the DoT issued Interpretive Circular 222 entitled

Holding Companies (Εταιρίες Συμμετοχών)

• The Circular repeats basic principles arising from Polysar and

subsequent cases on Holding companies

48

Circular 222

• However, the Circular states in paragraph 5:

«A holding company that controls the equity of some other legal persons, may influence their decisions e.g. with regards to investments made by those persons in which the majority of shares it owns. In this case, and if the facts substantiate it, the dividends from the shares may be regarded as consideration for the management services rendered.» Chelco VAT considers the above paragraph incorrect given that based

• n jurisprudence of the ECJ, dividends can never in itself constitute

consideration for a supply of services.

49

Circular 222

Following various representations, the Commissioner issued Interpretive Circular 225 on 31.01.2018, that states: «With regards to the 5th paragraph of IC 222, we clarify that this relates to a holding company that exercises investment economic activity connected to the holding of shares in other companies, in which case this relates to a taxable person, and exclusively in relation to services that form part of the exemption of paragraph 3(e) of Table B of the 7th Schedule [7ο Sch, Table Β 3(ε) = VAT exemption regarding transactions in shares]»  comment: instead of correcting the mistake of IC 222 and deleting paragraph 5, now the DoT considers that dividends constitute exempt income and should influence the pro-rata calculation?

50

Circular 222

The Department of Taxation should remove / delete:

• paragraph 5 of Circular 222
• paragraph (b) of Circular 225

The wording of the above mentioned paragraphs is not in accordance with jurisprudence of the ECJ of the last 35 years and have no legal grounds either based on the Cyprus VAT legislation or

• n the VAT Directive

Deductions

52

Deductions

• A right of deduction arises at the time the deductible tax

becomes chargeable [167]

53

Deductions: Non economic activities

• Securenta C-437/06 [2008]
• ECJ: Non-economic activities do not fall within the scope of the

VAT Directive

• ECJ: Thus, to the extent that input VAT relates to expenditure

incurred by a taxpayer connected with non-economic activities, it cannot give rise to a right to deduct.

• So must first apportion input VAT between economic and non-

economic activities [= pre pro-rata]

54

Deductions: Non economic activities

• Securenta, ECJ, Case C-437/06 [2008]
• The ECJ did not provide any details on how input VAT on general

expenses could be apportioned between economic and non-economic activities – “it is for the Member States to establish methods and criteria appropriate to that aim and consistent with the principles underlying the common system of VAT.”

• It stated that Member States are required to adopt measures which must

comply with the principle of fiscal neutrality on which the common system of VAT is based.

55

Deductions: Economic activities

• Input tax is deductible when it relates to output transactions

that provide a right of deduction. Such output transactions can be:

• Taxable transactions (domestic, I/C, or o/s of EU)

[168, 169(a)]

• Certain exempt insurance and financial transactions where

the recipient is outside of the EU thus providing right of deduction [169(c)]

• ‘Zero rated’ transactions

[168, 169(b)]

56

Deductions: Economic activities

• Input tax is not deductible when it relates to output

transactions that are exempt i.e. do not provide a right of deduction

• Input tax is not deductible when it does not relate to

expenditure which is not strictly business expenditure (e.g. luxuries, amusements, entertainment) [176]

57

Deductions: Economic Activities Proportional Deduction

• Input tax is deductible where the cost forms part of the taxable

person’s general costs, which in turn form a component of the price of the goods or services supplied

• However, where goods and services are used for taxable and non-

taxable outputs, only such proportion of the VAT attributable to the former is deductible [173]

58

Deductions: Economic Activities Proportional Deduction

• The deductible proportion, shall be made up of the following

fraction [174]:

• as numerator, the total amount, exclusive of VAT, of turnover per year

attributable to transactions in respect of which VAT is deductible

• as denominator, the total amount, exclusive of VAT, of turnover per

year attributable to transactions included in the numerator, and to transactions in respect of which VAT is not deductible

• MS are allowed to use another method for determining the

deductible amount in order to reach more precise results in calculating the deductible proportion [173]

59

Deductions: Economic activities

• Midland Bank C-98/98 [2000]
• A non-EU client of the bank entered into a legal dispute with

another company, which also brought legal proceedings against Midland Bank for misrepresentations. The bank incurred legal fees

• n which it claimed the input VAT in full as being related to financial

services provided to the non-EU client.

• The UK tax authorities stated that the legal services were to defend

the bank against potential negligence of the bank incurred whilst performing services to the non-EU client. As such, the input VAT relates to general costs (overheads) and should be apportioned.

60

Deductions: Economic activities

• Midland Bank C-98/98 [2000]
• ECJ: the right to deduct must have a direct and immediate link

with the taxable transaction

• ECJ: the right to deduct the VAT charged on goods or services

presupposes that the expenditure incurred in obtaining them was part of the cost components of the taxable transactions.

61

Deductions: Economic activities

• Midland Bank C-98/98 [2000]
• ECJ: There is no direct and immediate link between the legal

services and the services provided to the non-EU client.

• ECJ: The legal services form part of the general costs because

they were incurred not for providing financial services to the non-EU client, but as a consequence of providing financial services to the non-EU client.

62

Deductions: Summary (1)

Input VAT on goods/ services Non-economic activities (“pre- pro-rata deduction”) economic activities No right of deduction right of deduction As per summary (2)

63

Deductions: Summary (2)

ECONOMIC ACTIVITIES

Input VAT on goods/ services direct and immediate Non attributable to specific output transactions but

Taxable transactions Non-business /exempt transactions

Full right of deduction No right of deduction Pro-rata deduction

Direct and immediate link to general costs

64

Deductions: Economic activities

• However, as an exception and in specific circumstances,

right to deduct exists even if a direct and immediate link between a particular input transaction and an output transaction(s) giving rise to the right to deduct cannot be established

– INZO C-110/94 [1996] – Ghent Coal Terminal C-37/95 [1998]

65

Deductions: Economic activities

INZO C-110/94 [1996]

• INZO incurred expenses in commissioning a study for the construction
• f a desalination plant. It reclaimed, and received, the input VAT on

the professional fees. Due to profitability concerns the project never materialised and INZO was placed in liquidation without having undertaken any taxable transactions.

• Dutch tax authorities denied right of deduction stating that in light of

no taxable transactions, INZO was never a taxable person and has no right to deduct.

• ECJ: even the first expenditure may be regarded as economic activity

and the status of ‘taxable person’ may not be withdrawn retroactively merely because the company did not move to the operational phase. Right to deduct thus exists.

66

Deductions: Rules governing exercise of right

• Depending on type of transaction, taxable persons must adhere

to rules in order to be able to exercise the right of deduction

• Principally:

– hold a valid invoice, and/or – comply with formalities as laid down by the MS, and/or – set out required information in VAT return, and/or – hold a valid import document. [178]

Deductions

Pro-Rata Example

68

Deductions: Pro-Rata Example

• CyCo A has the following forms of income:
• Income from consultancy services to Dutch company €50.000
• Income from consultancy services to Cyprus company €15.000
• Interest income from loans to Italian company €10.000
• Interest income from loans to Russian company €75.000
• Dividend income from French subsidiary €5.000
• Dividend income from Swiss subsidiary €20.000
• Total income: €175.000

69

Deductions: Pro-Rata Example

• CyCo A has the following forms of expenses:
• Consultancy expense from Greek supplier relating to the consultancy services

provided to Dutch company €20.000

• Interest expense relating to back-to-back loan received for provision of Italian

loan €7.500

• Legal expenses from Russian lawyers relating to draft of loan agreement for

provision of Russian loan €5.000

• Bookkeeping expenses from Cyprus service provider relating to French

subsidiary €2.000 + VAT

• Professional services received from Swiss lawyers for the acquisition of the

shares in the Swiss subsidiary €10.000

• Audit services €5.000 + VAT
• Purchase of cigars from Cyprus supplies for the use of the director €500

(inclusive of Cyprus VAT)

• Total expenses: €50.000

70

Deductions: Pro-Rata Example

• Is CyCo obligated to register for VAT?
• Yes. It has consultancy income to a Cyprus company of €15.000 which

is under the registration threshold of €15.600 but it also has received services from outside of Cyprus (consultancy and legal services) on which the reverse charge applies.

• In total the above exceed the registration threshold and so CyCo must

register for VAT.

• In addition, if the Dutch company is VAT registered in the Netherlands,

then CyCo must register for VAT in order to report the transaction on VIES (no threshold applies in this case).

71

Deductions: Summary (1)

Input VAT on goods/ services Non-economic activities (“pre- pro-rata deduction”) economic activities No right of deduction right of deduction As per summary (2)

72

Deductions: Pro-Rata Example

• From the data we can see that the CyCo has 2 subsidiaries
• One in France
• One is Switzerland
• If CyCo provides any services to the subsidiaries for

consideration, then then ‘holding’ of the subsidiary shares will be considered as an economic activity providing full right of deduction => no pre pro-rata will be undertaken (Polysar)

• However from the data, no such income from the subsidiaries is

noted therefore a pre pro-rata will be required (Securenta)

73

Deductions: Pro-Rata Example

• As such, the following expenses relate to the holding, which is a

non-economic activity:

• Bookkeeping expenses from Cyprus service provider relating to French

subsidiary €2.000 (Cyprus VAT would apply on the invoice)

• Professional services received from Swiss lawyers for the acquisition of

the shares in the Swiss subsidiary €10.000 (CyCo would apply reverse charge).

• No deduction is allowed for the above.
• CyCo would also apply a pre pro-rata on the audit services

which form a general overhead of the company. There is no formula for this. We will assume a 2,5% pre pro-rata percentage will be acceptable.

74

Deductions: Pro-Rata Example

• VAT therefore payable / not recoverable due to pre pro-rata:
• € 380 (being €2.000 *19%) for bookkeeping expenses from Cyprus service

provider relating to French subsidiary (Cyprus VAT would apply on the invoice)

• €1.900 (being €10.000 *19%) for professional services received from

Swiss lawyers for the acquisition of the shares in the Swiss subsidiary (CyCo would apply reverse charge)

• € 23,75 (being €5.000 *19%*2,5%) for audit services received (Cyprus

VAT would apply on the invoice)

75

Deductions: Summary (2)

ECONOMIC ACTIVITIES

Input VAT on goods/ services direct and immediate Non attributable to specific output transactions but

Taxable transactions Non-business /exempt transactions

Full right of deduction No right of deduction Pro-rata deduction

Direct and immediate link to general costs

76

Deductions: Pro-Rata Example

• Further expenses of CyCo A :
• Consultancy expense from Greek supplier relating to the consultancy

services provided to Dutch company €20.000

• Directly attributable to provision of consultancy services therefore

reverse charge would apply with full right of deduction

• Interest expense relating to back-to-back loan received for provision of

Italian loan €7.500

• Exempt expense – no VAT consequences
• Legal expenses from Russian lawyers relating to draft of loan agreement

for provision of Russian loan €5.000

• Directly attributable to provision of financing services to a recipient
• utside of the EU therefore reverse charge would apply with full right
• f deduction

77

Deductions: Pro-Rata Example

• Further expenses of CyCo A (continuation):
• Cigar expenses €500
• Directly attributable to non-business expenses and so no right of

deduction for VAT of €79,83 (€500 * 19/119)

78

Deductions: Pro-Rata Example

• Further expenses of CyCo A (continuation):
• Audit expenses €5.000 + VAT
• VAT on this amounts to €950 (€5.000 * 19%)
• €23,75 already accounted for through pre pro-rata
• €926,25 (€950 - €23,75) therefore remains
• This is a general overhead – input VAT will be claimed using pro-rata

calculation

79

Deductions: Pro-Rata Example

• Further expenses of CyCo A (continuation):
• Input VAT on audit fees remaining €926,25
• as numerator, the total amount, exclusive of VAT, of turnover per year

attributable to transactions in respect of which VAT is deductible

• as denominator, the total amount, exclusive of VAT, of turnover per year

attributable to transactions included in the numerator, and to transactions in respect of which VAT is not deductible

80

Deductions: Pro-Rata Example

• Pro-rata:

50.000+15.000+75.000

• 50.000+15.000+75.000+10.000
• Gives a % of 93,33%
• Rounded up to next whole number

therefore 94%

• Remaining Input Vat recoverable on

audit fees = €926,25 * 94% = €870,68 Income:

• Income from consultancy services to

Dutch company €50.000 full right

• Income from consultancy services to

Cyprus company €15.000 full right

• Interest income from loans to Italian

company €10.000 no right

• Interest income from loans to Russian

company €75.000 full right

• Dividend income from French

subsidiary €5.000 ignore

• Dividend income from Swiss subsidiary

€20.000 ignore

Holding Companies

Deduction in the case of acquisition of shares

82

Deduction for acquisition of shares

• Cibo, ECJ, Case C-16/00 [2001]
• Cibo is a holding company which owns significant shareholdings in three

undertakings specialising in bicycles.

• Cibo acquired the shares in its subsidiaries receiving for this purpose

various third party services, including the auditing of the companies, assistance with the negotiation of the purchase price of the shares,

• rganising the take-over of the companies and legal and tax services. It

deducted the input VAT on these services.

• The tax authorities refused the deduction of the input VAT for the supply
• f the aforementioned services

83

Deduction for acquisition of shares

• Cibo, ECJ, Case C-16/00 [2001]
• Cibo pointed out that:
• its chairman became the chairman of the three subsidiaries,
• it provides services to those subsidiaries against payment,
• CIL (Cibo’s main shareholder) makes available, against payment, qualified

staff to work in its subsidiaries in general, administrative, financial, commercial and technical management, and

• the subsidiaries were invoiced for those services on a flat-rate basis of 0.5%
• f their turnover.
• Cibo maintains that it is thus involved in the management of its

subsidiaries and that, consequently, the expenditure linked to its acquisition of shares falls within the scope of VAT as general expenses, given that it pertains to the holding company's general business.

84

Deduction for acquisition of shares

• Cibo, ECJ, Case C-16/00 [2001]
• The French tax authorities reply that Cibo derives most of its turnover

from the receipt of dividends.

• They claim Cibo does no more than act as consultant and direct group

policy, in respect of which it receives remuneration and so is neither directly nor indirectly involved in the management of its subsidiaries.

• Therefore, they claim the expenditure arising from its acquisition of

shareholdings has no connection with the services which it provides to its subsidiaries. It merely relates to its ownership of shares and receipt of dividends, which fall outside the scope of VAT.

85

Deduction for acquisition of shares

• Cibo, ECJ, Case C-16/00 [2001]
• However, even if Cibo were to be regarded as being involved in the

management of its subsidiaries, the French tax authorities maintain that the dividends must be associated with the company's economic activity and thus with its income falling within the scope of VAT, but that, given that they are exempted, a pro-rata deduction should be made.

86

Deduction for acquisition of shares

• Cibo, ECJ, Case C-16/00 [2001]
• ECJ: direct or indirect involvement in the management of subsidiaries

must be regarded as an economic activity where it entails carrying out transactions which are subject to VAT, such as the supply by a holding company such as Cibo of administrative, financial, commercial and technical services to its subsidiaries.

87

Deduction for acquisition of shares

• Cibo, ECJ, Case C-16/00 [2001]
• ECJ: in order to give rise to the right to deduct, the goods or services

purchased must have either a direct and immediate link with the output transactions in respect of which VAT is deductible,

• r
• the expenditure incurred in acquiring them are part of the taxable

person's general costs and are, as such, cost components of his products

• r services and thus have a direct and immediate link with the taxable

person's business as a whole

88

Deduction for acquisition of shares

• Cibo, ECJ, Case C-16/00 [2001]
• ECJ: the cost of the said services forms part of Cibos general costs and

thus have a direct and immediate link with Cibo’s business as a whole

• if Cibo carries out both transactions in respect of which VAT is deductible

and transactions in respect of which it is not, it follows that it may deduct only that proportion of the VAT which is attributable to the former.

• however, the receipt of dividends is not the consideration for any

economic activity, it does not fall within the scope of VAT, and thus is ignored for the deduction calculation

Holding Companies

Deduction in the case of sale of shares

90

Deduction for sale of shares

• The trading in shares constitutes an economic activity since it is

undertaken with the purpose of obtaining income therefrom on a continuing basis.

• In this case, the activity is exempt from VAT since it has to do with

shares, i.e. there is no deduction for related input VAT.

• In the case however where the shares were acquired as a non-taxable

persons, then the subsequent sale of the shares does not alter the classification of the non-taxable person

91

Deduction for sale of shares

• Wellcome Trust, ECJ, Case C-155/94 [1996]
• Sir Henry Wellcome, who died in 1936, provided in his will, that the

management of all his shares in a Foundation, having the underlying pharmaceutical business of Burroughs, Wellcome and Co, was to be entrusted to the Trustees of the Wellcome Trust.

• The Trust was to use the proceeds from the shares for research into

human and animal medicine and for the study of the history of medicine.

92

Deduction for sale of shares

• Wellcome Trust, ECJ, Case C-155/94 [1996]
• Over the next 60 years, the Wellcome Trust effected the sale of a number
• f shares, over two specific Share Sales periods, to a large number of

buyers, the proceeds from which were used for other investments.

• In 1993, the Trust applied for a refund of input VAT on expenditure

incurred in the preparation of the Second Share Sale, which the Trust considered to be an economic activity. The amount of VAT reclaimed represented 33.22% of the total tax paid on the expenditure incurred and corresponded to the percentage of shares sold to persons resident

• utside the Community.

93

Deduction for sale of shares

• Wellcome Trust, ECJ, Case C-155/94 [1996]
• The UK VAT Commissioners rejected the above application on the ground

that the shares and other securities held by the Trust were held for charitable purposes and that the disposals in question had not been made in the course or furtherance of any business carried on by the Trust

94

Deduction for sale of shares

• Wellcome Trust, ECJ, Case C-155/94 [1996]
• ECJ: the mere exercise of the right of ownership by its holder cannot, in

itself, be regarded as constituting an economic activity

• if such activities do not in themselves constitute an economic activity,

the same must be true of activities consisting in the sale of such holdings.

95

Deduction for sale of shares

• AB SKF, ECJ, Case C-29/08 [2009]
• The share company SKF is the parent company of an industrial

group which carries on activities in a number of countries.

• It plays an active role in the management of its subsidiaries and

supplies to them, for consideration, services, including management, administration and marketing policy.

• Those services are invoiced to the subsidiaries and SKF is liable for

VAT on them.

96

Deduction for sale of shares

• AB SKF, ECJ, Case C-29/08 [2009]
• SKF intends to restructure its group and, in that connection, to

dispose of the business of two subsidiaries.

• The reason for those disposals is to obtain funds to finance other

activities of the group.

• In order to carry out those disposals, SKF will acquire supplies of

services in the area of valuation of shares, assistance with negotiations and specialised legal advice for the drafting of the contracts.

97

Deduction for sale of shares

• AB SKF, ECJ, Case C-29/08 [2009]
• SKF believes it has a full right of deduction of input VAT. It applied

to the department for rulings of the Swedish VAT authorities for a preliminary ruling and receive a positive ruling

• The Tax Agency of the Swedish authorities appealed against this

ruling to the courts

98

Deduction for sale of shares

• AB SKF, ECJ, Case C-29/08 [2009]
• ECJ: The disposals carried out in order to enable SKF to restructure

the group of companies, can be regarded as a transaction that consists in obtaining income on a continuing basis from activities which go beyond the compass of the simple sale of shares

• The disposals have a direct link with the organisation of the activity

carried out by the group and constitutes accordingly the direct, permanent and necessary extension of the taxable activity of the taxable person, and thus comes within the scope of VAT.

Holding Companies

Deduction in the case of new issue of shares

100

Deduction for issue of shares

• Kretztechnik, ECJ, Case C-465/03 [2005]
• Kretztechnik is a company established in Austria whose objects are

the development and distribution of medical equipment.

• By resolution of its general meeting of shareholders of 18 January

2000, its capital was increased from EUR 10 million to EUR 12.5 million.

• With a view to raising the capital needed for that increase, it

applied for admission to the Frankfurt Stock Exchange.

101

Deduction for issue of shares

• Kretztechnik, ECJ, Case C-465/03 [2005]
• The Austrian tax authorities did not allow deduction of the input

VAT paid by Kretztechnik on the supplies linked with its admission to the stock exchange, because the issuing of shares was regarded as being exempt from VAT.

102

Deduction for issue of shares

• Kretztechnik, ECJ, Case C-465/03 [2005]
• The Austrian court asked the ECJ to clarify:

① Whether, in becoming listed on a stock market and in issuing shares to new shareholders in return for the issue price, a public limited company is making a supply for consideration? ② In the case of a negative answer, does Kretztechnik have a right of deduction for the input VAT on services it received for the listing

• n the stock market?

103

Deduction for issue of shares

• Kretztechnik, ECJ, Case C-465/03 [2005]
• ECJ: a share issue does not constitute a supply of goods or of services

for consideration. Such a transaction, whether or not carried out in connection with admission of the company concerned to a stock exchange, does not fall within the scope of that directive.

• From Kretztechnik’s point of view, the aim is to raise capital and not to

provide services. As far as the shareholder is concerned, payment of the sums necessary for the increase of capital is not a payment of consideration but an investment or an employment of capital.

104

Deduction for issue of shares

• Kretztechnik, ECJ, Case C-465/03 [2005]
• ECJ: in view of the fact that, first, a share issue is an operation not

falling within the scope and, second, that operation was carried out by Kretztechnik in order to increase its capital for the benefit of its economic activity in general, it must be considered that the costs of the supplies acquired by that company in connection with the

• peration concerned form part of its overheads and are therefore, as

such, component parts of the price of its products. Those supplies have a direct and immediate link with the whole economic activity of the taxable person

105

Deduction for issue of shares

• Kretztechnik, ECJ, Case C-465/03 [2005]
• ECJ: Kretztechnik is entitled to deduct all the VAT charged on the

expenses incurred by that company for the various supplies which it acquired in the context of the share issue carried out by it, provided, however, that all the transactions carried out by that company in the context of its economic activity constitute taxed transactions.

Questions

Alexis Tsielepis a.tsielepis@chelcoVAT.com Panayiotis Panayi p.panayi@chelcoVAT.com