Holding company can only deduct input VAT related to its own taxable activities

On 8 September 2022, the Court of Justice of the European Union (“CJEU”) rendered an important judgment concerning the right to deduct input VAT by holding companies (Finanzamt R v. W GmbH, C-98/21). The CJEU ruled in essence that a holding company can only deduct input VAT insofar as it relates to its own output activities (and not to the output activities of its subsidiaries).

The case concerned a German company, W GmbH, an active holding company (i.e. VAT taxpayer), which provided accounting and management services, subject to VAT, to its subsidiaries (German Kommanditgesellschafts; “KGs”). The KGs had a very limited right to deduct input VAT as their output activities (i.e. construction and sale of buildings) were largely exempt from VAT. W GmbH also contributed various services (e.g. architectural and static calculation services, planning of heat and sound installation, energy supply, network connections, general contracting, etc.) into the KGs in exchange for a participation in the general profits of the KGs. This contribution was not subject to VAT. W GmbH deducted all the input VAT (also the input VAT related to the services it acquired from third parties and which were contributed into the KGs).

The CJEU ruled that the active holding company (W GmbH) did not have the right to deduct the input VAT related to the services it acquired from third parties and subsequently contributed into its subsidiaries as these costs: (i) were not directly and immediately linked to the holding company’s own activities but instead to the (largely) VAT-exempt activities of its subsidiaries; (ii) were not included in the price of the taxable transactions rendered to its subsidiaries (i.e. the accounting and management services); and (iii) were deemed not to form part of the general expenditure of the holding company’s own economic activity. 

Whereas this judgment applies the rules set out by the CJEU in its older case law, it also demonstrates that there are limits to the right to deduct by holding companies. Feel free to contact us to discuss the possible impact of this case law on your holding activities.