Case C-28/26 - Examines the right of a holding company

to deduct input VAT on services acquired in the interest

of its subsidiaries where those services are offered to its

subsidiaries with no consideration.

On 12 January 2017, the European Court of Justice delivered its judgment in the case of MVM

(C-28/16), concerning the right of MVM to deduct input value added tax (VAT) paid in relation to

services procured in the interest of its subsidiaries.

This case re-iterates the principles that need to be considered in order to determine whether the

involvement of a holding company, in the management of its subsidiaries, without charging

those subsidiaries either for the cost of the services procured in the interest of the group of

companies as a whole or in the interest of certain of its subsidiaries, nor for the corresponding VAT,

constitutes an ‘economic activity’, within the meaning of the Council Directive 2006/112/EC of

28 November 2006 (EU Principal VAT Directive).

A. Facts of the case

MVM is a Hungarian State-owned commercial company active in the energy sector. It leases power

plants and fibre optic networks as well as being the owner of a number of companies which mainly

generate or sell electricity.

MVM was responsible for the strategic management of the group (corporate group under

Hungarian law, not a VAT Group). For that purpose, it acquired legal, business-management and

public-relations services for the benefit of:

optic networks, subject, as such, to VAT;

MVM deducted the VAT relating to all of those services. However, even when those services

were in the interest of the entire group or related directly to the taxed activities of the other

members of the group, MVM did not, save for a few exceptions, charge its subsidiaries for those

services.

Nor did MVM impose a general charge on the group for its strategic management, with the result

that it carried out that activity free of charge.

During a tax inspection, the Tax Authority of Hungary took the position that VAT relating to the

legal, business-management and public-relations services could be deducted only to the extent to

which MVM had used those services in order to effect supplies of goods or services.

B. Questions referred to the European Court of Justice (ECJ) by

the Supreme Court:

subsidiaries, or of the group of companies as a whole, but which does not pass on to its

subsidiaries the cost of the services carried out in relation to its active holding activity or

the corresponding VAT be regarded as a taxable person for the purpose of VAT in respect

of those services?

the right to deduct the VAT corresponding to the services used by it which are directly

related to the taxed economic activity of some of its subsidiaries, and if so in what way?

the right to deduct the VAT corresponding to the services used which are in the interest

of the group of companies as a whole, and if so in what way?

its subsidiaries in respect of the abovementioned services as intermediary services, and if

so to what extent?

C. Judgment of the ECJ

C1. No Remuneration - No Economic Activity

The Court re-iterated that an activity is, as a general rule, categorised as ‘economic’ where it

is permanent and is carried out in return for remuneration which is received by the person

carrying out the activity, therefore, only services supplied for consideration by a taxable person

acting as such are subject to VAT.

The mere involvement of a holding company in the management of its subsidiaries, without carrying

out transactions subject to VAT under Article 2 of Directive 2006/112, cannot be regarded as an

‘economic activity’ within the meaning of Article 9(1) of that directive.

In the present case, MVM normally received no remuneration from its subsidiaries in exchange

for its centralised management of the activities of the group. Thus, in the light of the foregoing

considerations, it must be held that the involvement of MVM in the management of its subsidiaries

cannot be regarded as an ‘economic activity’, within the meaning of Article 9(1) of Directive

2006/112, such as to come within the scope of that directive.

It follows that MVM does not have the right to deduct the VAT paid for the services at issue

to the extent to which those services relate to transactions falling outside the scope of

Directive 2006/112.

C2. Direct and immediate link of the expenses of the company with the taxed

activities of the company

Further, the court recalled that in order for VAT to be deductible, the input transactions must have

a direct and immediate link with the output transactions giving rise to a right of deduction.

Therefore, it is irrelevant if the subsidiaries will use the relevant services for their taxed activities or

not.

It is common ground that, during the period at issue in the main proceedings, MVM engaged in a

taxable economic activity, namely the leasing of power plants and fibre optic networks. However,

it appears difficult to imagine that the services at issue, namely services procured in the interest of

other members of the group and business-management services relating mainly to the acquisition

of shareholdings, may have a direct and immediate link with that leasing activity, considered overall,

although this is a matter for the referring court to determine.

C3. The EU Principal VAT Directive does not provide for the method to be used

by Member States for the apportionment of input vat to economic and noneconomic

activities.

Following the assessment that certain of the services at issue relate to both economic and

non-economic activities of MVM, it should be borne in mind that the provisions of Directive

2006/112 do not include rules relating to the methods or criteria which the Member

States are required to apply when adopting provisions permitting the apportionment of input

VAT paid according to whether the relevant expenditure relates to economic activities or to noneconomic

activities.

In those circumstances, and in order that taxpayers can make the necessary calculations, it is for

the Member States to establish methods and criteria appropriate to that objective and consistent

with the principles underlying the common system of VAT. In particular, the Member States must

exercise their discretion in such a way as to ensure that deduction is made only for that

portion of the VAT that is proportional to the amount relating to the transactions giving

rise to the right to deduct.

In the case at hand, the Court considers that Articles 2, 9, 26, 167, 168 and 173 of Directive

2006/112 must be interpreted as meaning that, in so far as the involvement of a holding

company, such as that at issue in the main proceedings, in the management of its subsidiaries,

where it has charged those subsidiaries neither for the cost of the services procured in the

interest of the group of companies as a whole or in the interest of certain of its subsidiaries, nor

for the corresponding VAT, does not constitute an ‘economic activity’, within the meaning

of that directive, such a holding company does not have the right to deduct input VAT paid in

respect of those services in so far as those services relate to transactions falling outside the scope

of that directive.

Source:

HTML/?uri=CELEX:62016CO0028&qid=1484829870668&from=EN">http://eur-lex.europa.eu/legal-content/EN/TXT/

HTML/?uri=CELEX:62016CO0028&qid=1484829870668&from=EN

Author:

Demetra Constantinou

Manager

[email protected]

Disclaimer: This publication has been prepared as a general guide and for information purposes only. It is

not a substitution for professional advice. One must not rely on it without receiving independent advice

based on the particular facts of his/her own case. No responsibility can be accepted by the authors or the

publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.

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