1. VAT and Holding Companies
David Farrugia

2. Holding companies

3. Holding companies at a glance
Typically set up and incorporated with the principal aim of holding shares in subsidiary companies.
Very commonly used in many structures around the globe. Malta is not an exception and over the past decade has established itself as the seat of various holding company structures.
We will be discussing the implications of VAT for holding companies. Holding companies are typically set up and incorporated with the main aim of holding shares in subsidiary companies. Therefore, at face value, a holding company may not seem to qualify as a ‘taxable person’ for VAT purposes – even though the definition of ‘taxable person’ is quite wide in scope.
However it will become apparent throughout this short presentation that a holding company may actually qualify as a taxable person and that more importantly, the VAT implications for holding companies are not always clear and straightforward.
Holding companies are ideal for structuring investments. Examples of general (non-fiscal) benefits include:
The possibility of retention of funds in the holding company for re-investment;
Decentralized management;
Easier to add/dispose of unprofitable subsidiaries than to close off whole divisions of a single entity;
Legal and regulatory framework in many jurisdictions enable holding companies to diversify regulated operations via varied portfolios of specialist subsidiary companies.

4. “Taxable person”

5. Is a holding company a ‘taxable person’ ?
The term “taxable person” is defined under Council Directive 2006/112/EC of 28 November 2006 (the “VAT Directive”) as “any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity”.
In turn, “economic activity” includes any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions as well as exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis.
On such basis – is a holding company a ‘taxable person’?
A brief outline of the charging provisions under VAT law is necessary in order to identify the links and connections between holding companies and VAT.
In general, the Maltese VAT Act (naturally reflecting the position under the VAT Directive) charges to VAT any supply of goods and services, or any ICA made by a taxable person.
This is in line with Council Directive 2006/112/EC of 28 November 2006 (the “VAT Directive”) whereby a supply or ICA is charged to VAT if essentially it is provided by a ‘taxable person’.
The definition of “taxable person” is intrinsically linked to the definition of “economic activity” – because in general any person carrying out an economic activity is considered to be a taxable person.
Turning on to the definition of “economic activity” – this is very wide in scope – practically including any:
Trade, business;
Profession, provision of personal services;
Exploitation of tangible/intangible property for the purposes of obtaining income therefrom on a continuing basis;
Admission, for consideration, of persons to any premises
This brings us to a fundamental question – does a holding company qualify as a taxable person?
Predictably, the implications in this respect can be significant for holding companies – should a holding company qualify as a taxable person it may be liable to charge VAT – and it may also qualify for the right of deduction of input VAT which it incurred in its trade or business!

6. Activities of holding companies
Pure holding companies versus mixed holding companies
Pure holding companies: merely set up to hold shares in subsidiary companies - with the only income being restricted to dividends and any eventual capital gains arising from such shares.
Mixed holding companies: contrary to pure holding companies, mixed holding companies would also be involved in other business activities (e.g. granting of credit facilities and loans, holding of IP rights) in addition to the actual holding of shares in their subsidiaries.
In this respect, various ECJ judgments have had the opportunity to distinguish between pure holding companies and mixed holding companies when determining whether a holding company is considered as a taxable person or not.
Pure holding companies: merely set up to hold shares in subsidiary companies - with the only income being restricted to dividends and any eventual capital gains arising from such shares.
Mixed holding companies: on the other hand, mixed holding companies would typically also be involved in the provision of other activities (e.g. management activities, granting of credit, loans) to its subsidiaries in addition to the actual holding of shares.
Therefore, is there a clear dividing line between pure and mixed holding companies? The ECJ in the Polysar Judgment made it clear that generally only holding companies whose sole income consisted in dividends and capital gains are to be considered as pure holding companies.

7. The Polysar Case (ECJ C-60/90)
POLYSAR Ltd (Canada)
Key facts:
Polysar Investments Netherlands BV (“Polysar”) (a company incorporated in the Netherlands) held shares in foreign companies which were engaged in the production and sale of synthetic rubber and similar products.
100 %
Dividends
POLYSAR Holding Ltd (Canada)
100 %
Dividends
POLYSAR Investments Netherlands BV
On an annual basis Polysar received substantial amounts in dividends and paid out dividends to the parent company. Polysar itself was not engaged in any trading activities.
FACTS OF THE CASE:
The Polysar Judgment concerned a holding company (Polysar Investments Netherlands BV – referred to as “Polysar”) which was incorporated under Netherlands law. This company held shares in foreign companies which were engaged in the production and sale of synthetic rubber and similar products.
Polysar was itself a wholly owned subsidiary of another company, which was in turn wholly owned by yet another company (both companies were incorporated in Canada).
Polysar itself was not engaged in any trading activities – yet on an annual basis it received substantial amounts in dividends and paid out dividends to the parent company.
Polysar challenged an assessment by the Dutch Authorities whereby Polysar claimed that it was entitled to a refund of the VAT which it was charged by 3rd parties.
Dividends
Dividends
Subsidiary
Subsidiary

8. Polysar: the key issues
Polysar challenged an assessment by the Dutch Authorities - Polysar claimed that it was entitled to a refund of the VAT charged by third parties.
The Regional Court of Appeal sought a preliminary ruling from the ECJ on various issues, mainly:
whether a holding company whose activities are concerned solely with the holding of shares in subsidiary companies must be regarded as a taxable person in terms of the VAT Directive; and
if, in the event of a negative answer (to the first question) would the holding company be considered as a taxable person if it forms part of a link in and an integral part of a world-wide group of undertakings which in the main outwardly appears under a single name, namely the group name.
The Regional Court stayed proceedings and sought a preliminary ruling from the ECJ on various matters.
However the main question asked concerned whether a holding company whose activities are concerned solely with the holding of shares in subsidiary companies should be regarded as a taxable person in terms of the VAT Directive.
Another question which was asked sought to clarify whether if, in the event of a negative answer (to the first question) would the holding company be considered as a taxable person if it forms an integral part and a link of a world-wide group of undertakings (which is a taxable person)?
Polysar contended that as a world-wide undertaking, the group is a taxable person and all the components of the group are then part of that taxable person. The various parts must then be regarded as taxable persons for the purposes of the deduction rules provided in the VAT Directive and can deduct VAT when the group as such provides taxable services under the Community rules.

9. Polysar: the court’s decision
The Court in its judgment established that:
“…… Article 4 of the Sixth Directive is to be interpreted as meaning that a holding company whose sole purpose is to acquire holdings in other undertakings, without involving itself directly or indirectly in the management of those undertakings, without prejudice to its rights as a shareholder, does not have the status of a taxable person for the purposes of value added tax and therefore has no right to deduct tax under Article 17 of the Sixth Directive.”
The Court in its judgment in the Polysar case established that:
“a holding company whose sole purpose is to acquire holdings in other undertakings, without involving itself directly or indirectly in the management of those undertakings……, does not have the status of a taxable person for the purposes of value added tax and therefore has no right to deduct tax under Article 17 of the Sixth Directive”.
The ECJ continued by concluding that:
The fact that the holding company belongs to a world-wide group of undertakings, which appears outwardly under a single name, is not relevant to the company's classification as a taxable person for the purposes of value added tax.

10. Polysar: the Court’s analysis
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.
In this respect the fundamental issue to consider is whether the holding company involves itself directly or indirectly in the management of the companies in which it acquired such holding(s).
A crucial element of this case’s analysis is the determination as to whether the holding company is considered to be exploiting intellectual property and therefore whether it should be deemed to qualify as a ‘taxable person’ in terms of the VAT Directive.
The Court held that in the absence of direct/indirect involvement in the management of the subsidiaries, a holding company is considered not to be exploiting intellectual property but merely owning such property.
This judgment is an important judgment which was cited by various subsequent judgments of the ECJ (e.g. the Cibo judgment) that sought to analyse the position of holding companies in terms of the VAT Directive.
This judgment provided a clear analysis of what is deemed to constitute ‘exploitation of property’ in terms of the definition of ‘taxable person’ in the VAT Directive, and a clear explanation of what constitutes a pure and mixed holding company.

11. Case C-16/00 (the “Cibo case”)
In Case C-16/00 (the “Cibo case”) the ECJ considered the main criteria to be assessed when determining what level of involvement in the subsidiaries’ management is deemed to constitute an economic activity.
Cibo Participations SA (“Cibo”) was a holding company that provided (against payment) management services to its subsidiaries – this included the availability of qualified staff to work in its subsidiaries – primarily in general, administrative, financial, commercial and technical management.
Cibo argued that on such basis it is involved in the management of its subsidiaries.
The ‘Cibo case’ is another interesting judgment in this respect. The company (Cibo) was a French holding company which provided various services (against payment) to its subsidiaries. These services included various management, technical and administrative activities.
The company challenged a domestic court’s decision whereby it was not allowed to deduct VAT which it incurred in respect of the supply of various services for which it was invoiced by 3rd parties. These services included the auditing of companies, assistance with negotiation of the purchase price, tax and legal services, etc. and were incurred by the holding company in connection with the acquisition of shares in its subsidiaries.
Cibo maintained that it is involved in the management of its subsidiaries by virtue of the various management services that it provided (against payment) to its subsidiaries.

12. Involvement in subsidiaries
On the other hand, the French Authorities claimed that Cibo derives most of its turnover from the receipt of dividends.
The French Authorities held the view that apart from its financial role – Cibo does no more than act as consultant and direct group policy, in respect of which it receives remuneration. Consequently:
Cibo is neither directly nor indirectly involved in the management of its subsidiaries; and
the expenditure arising from its acquisitions 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.
On the other hand, the French Government claimed that the holding company derives most of its turnover from the receipt of dividends and that:
It does not conduct any commercial transactions in its own name;
the companies within the group remain legally independent;
apart from its financial role –the holding company only acts as consultant and directs group policy, in respect of which it receives remuneration.
Consequently the French government held the view that:
Cibo is neither directly nor indirectly involved in the management of its subsidiaries
The expenditure arising from its acquisitions 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.
The French Authorities held that even in the case that Cibo was to be considered as being involved in the management of its subsidiaries, the dividends must be associated with the company’s economic activity and thus with its income falling within the scope of VAT BUT:
Given that they are exempted in accordance with Article 13B(d) of the Sixth Directive, a pro-rata deduction should be made.

13. What does ‘involvement’ imply?
In the Cibo judgment the ECJ ruled that:
“The involvement of a holding company in the management of companies in which it has acquired a shareholding constitutes an economic activity … (within the meaning of the Directive) …, where it entails carrying out transactions which are subject to value added tax by virtue of Article 2 …(of the Directive) …, such as the supply by a holding company to its subsidiaries of administrative, financial, commercial and technical services”
The main question which was referred to the ECJ in Cibo sought to establish what criteria should be applied when determining whether a holding company’s involvement in its subsidiaries amounted to an economic activity.
In summary, the ECJ ruled by direct reference to whether the activities that the holding company was providing to its subsidiaries were themselves subject to VAT. Therefore, in a nutshell, in the event that these activities were subject to VAT, the holding company was considered to be carrying out an economic activity by virtue of these activities themselves (in this case management activities).

14. Cibo: the Court’s analysis
A holding company whose sole purpose is to acquire holdings in other undertakings and which does not involve itself directly or indirectly in the management of those undertakings does not have the status of a taxable person (basing itself on the findings of the Polysar case).
Expenditure incurred by a holding company in respect of the various services which it purchases in connection with the acquisition of a shareholding in subsidiary forms part of its general costs and therefore has, in principle, a direct and immediate link with its business as a whole.
The ECJ in the Cibo case referred to various other judgments in its ruling – particularly the Polysar Judgment and the Floridienne and Berginvest Judgment when determining whether the holding company was considered to be involved in the management of its subsidiaries.
The Court also repeated the main arguments of the Court in the Polysar Judgment in terms of what constitutes ‘exploitation of property’: 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.
The Court also established that there was no link between the output transactions of the holding company (the provision of management services and other services) and the services purchased by the holding company to acquire the shares in the subsidiaries.
However, the costs of those services are part of the taxable person’s general costs and are, as such, cost components of an undertaking’s products. Therefore in principle such services have a direct and immediate link with the taxable person’s business as a whole.
(The Cibo judgment also discussed the mechanics of the deduction system. It confirmed the applicability of the mechanism used to determine the proportion of input VAT that may be deducted by holding companies involved in the provision of services or activities in respect of which VAT is deductible and other services in respect of which VAT is not deductible - such companies may only deduct the proportion of VAT attributable to the former).

15. The deductible proportion

16. The deductible proportion of input VAT: other judgments
To what extent should holding companies be entitled to deduct their input VAT?
The Cibo judgment made various references to other judgments in this respect – notably ECJ C-142/99 (Floridienne and Berginvest). The latter judgment considered the question:
‘Must share dividends and interest on loans always be excluded from the denominator of the fraction used to calculate the deductible proportion, even where the company receiving such dividends and interest has involved itself in the management of the undertakings paying them, save in the exercise of its rights as shareholder?’
The Court in the Cibo judgment also discussed the mechanics of the deduction system and confirmed that the apportionment method under Article 17(5) of the Directive (or Article 173 of the Directive currently in force) (when a taxable person uses goods and services both for transactions in respect of which VAT is deductible and transactions in respect of which VAT is not deductible) is also applicable to holding companies. Under such method only the proportion of the VAT attributable to taxable transactions is deductible. In such cases the proportion of input VAT to be deducted is calculated for the entirety of the transactions carried out by the taxable person and shall be made up of a fraction having:
As numerator, the total amount, exclusive of VAT, of turnover per year attributable to transactions in respect of which VAT is deductible under the VAT Directive; and
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.
When discussing the applicability of this method to holding companies, the Court referred to the Floridienne and Berginvest judgment.
The facts of the case in the Floridienne and Berginvest judgment are similar to the facts in the Cibo judgment. It involved two holding companies that claimed that they were directly/ indirectly involved in the management of their subsidiaries by virtue of accounting, IT & loan finance provided to the subsidiaries. In these cases the holding companies used to receive dividends and interest on loans from the subsidiaries. Floridienne and Berginvest deducted all the input VAT that they incurred – something which the Belgian tax authorities challenged.
This posed the main question to be faced by the ECJ in the Floridienne and Berginvest Judgment:
Should dividends and loans (received by the holding company from its subsidiaries) always be excluded from the denominator even when the holding company was involved in the management of such subsidiaries?

17. Dividends and deductibility
In terms of dividends, the ECJ in Floridienne and Berginvest established that the receipt of dividends is dependent on the financial results of a company at year end and is not linked to a particular shareholder’s identity or to the provision of services by such shareholder.
Floridienne and Berginvest’s main arguments: no link between the taxable management activities provided to their subsidiaries and the dividends – dividends are received irrespectively of whether such activities are provided or not.
Belgian Government & Commission held that the involvement in the subsidiaries amounted to exploitation of an asset for the purpose of obtaining income from it – in the form of dividends.
In terms of the inclusion of the dividends in the denominator of the fraction used to determine the proportion of the deductible proportion:
Floridienne and Berginvest’s main arguments:
although the holding company is subject to VAT in respect of the management activities which it provides to the subsidiaries, the dividends paid by the same subsidiaries to the holding company are not related to such management activities unless they constitute payment for such activities.
Such payment would presuppose that that there is a direct link with activities that are subject to VAT. However, such link does not exist since the dividends are paid as a result of a decision taken unilaterally by the subsidiary and the same dividend is declared in respect of all the shares of a given class, irrespective of whether the shares are owned by the holding company.
Furthermore, Floridienne and Berginvest point out that independently of the dividends allocated to them, they receive specific remuneration for the services they supply to their subsidiaries.
On the other hand, the Belgian Government and the Commission held that:
the involvement of a parent company in the management of its subsidiaries must be regarded as an economic activity consisting in the exploitation of an asset for the purpose of obtaining income from it in the form of dividends. To that extent, the dividends do actually constitute consideration for that economic activity.
Those dividends should therefore be included in the fraction used to calculate the deductible proportion, but solely in the denominator since the activity concerned is not one in respect of which deductions may be made.
NATURALLY IF THE BELGIAN GOVERNMENT AND COMMISSION’S APPROACH IS FOLLOWED, THE DEDUCTIBLE PROPORTION WILL AMOUNT TO A REDUCED FRACTION OF VAT THAT FLORIDIENNE AND BERGINVEST CAN CLAIM !

18. Financing activities
With regards to interest, Floridienne and Berginvest held that making capital available to a third party constitutes an economic activity consisting in exploiting assets only when it involves more than merely managing an asset and is directly linked to another taxable activity. In this case the two companies had merely reinvested the dividends paid to them by their subsidiaries in the form of loans to some of these subsidiaries – with no link between the management services provided to subsidiaries.
Belgian Government and Commission’s main arguments:
the income from loans to subsidiaries constituted the direct, permanent and necessary extension of a taxable activity - accordingly such income must be included in the denominator to calculate the deductible proportion.
In terms of interest received by Floridienne and Berginvest from their subsidiaries, these two holding companies took a similar approach and claimed that there was no direct link between the loans granted to the subsidiaries and the management activities provided to the subsidiaries. In this case they were merely re-investing dividends paid to them by their subsidiaries – which was incidental to the main activity – the holding of shares - which was out of the scope of VAT.
On the other hand, the Belgian Gov and the Commission took the opposing view and claimed that the income received from the loans to the subsidiaries constitutes the direct, permanent and necessary extension of a taxable activity (in this case the supply of the management activities) provided to the subsidiaries.

19. The link with taxable activities
In its ruling the ECJ in Floridienne and Berginvest held that the following must be excluded from the denominator of the fraction used to calculate the deductible proportion:
share dividends paid by the subsidiaries to a holding company which is a taxable person in respect of other activities and which supplies management activities to the same subsidiaries; and
interest paid by the subsidiaries to the holding company on loans it made to them, where the loans do not constitute, for the purposes of Article 4(2) of the Sixth Directive, an economic activity of the holding company (as a taxable person acting as such)
In its rulings the ECJ excluded the dividend income as well as the interest income from the denominator. What were the main considerations of the ECJ?
Dividend income:
The Court held that the receipt of dividends is dependent on the financial results of a company at year end and is not linked to a particular shareholder’s identity or to the provision of services by such shareholder.
Interest income:
The Court determined that Article 2(1) of the Sixth Directive excludes from the scope of VAT any transactions in which the taxable person is not acting as such. Therefore loan transactions such as those being considered in the main proceedings in this case are only subject to VAT if they constitute either an economic activity of the operator within the meaning of Article 4(2), or the direct, permanent and necessary extension of a taxable activity.
Reinvestment of dividends from subsidiaries (outside the scope of VAT) in loans to the same subsidiaries in no way constitutes a taxable activity. On the contrary, the interest on such loans must be considered merely as the result of ownership of the asset – therefore out of the scope of the system of deductions.

20. Attribution to economic and non-economic activities
The recent case C-496/11 (“Portugal Telecom case”) decided by the ECJ on 6 September 2012 considered the apportionment method for holding companies involved in the supply of goods/services that give rise to the right of deduction and goods/services in respect of which no right of deduction is available.
Specifically, the Portugal Telecom case confirmed that where goods and services are used both for economic and non-economic activities, the provisions of Article 17(5) establishing the apportionment mechanism do not apply for apportionment between these activities – it is up to the member states to determine the method of application which objectively reflects the input expenditure actually attributed to each of these activities.
To what extent can the method provided in Article 17(5) (or Article 173 of the Directive currently in force) be applied in the case of a taxable person providing economic activities and other activities which are not economic activities?
In its relatively recent judgment in Portugal Telecom, the ECJ held that this method is not applicable for apportionment between economic and non-economic activities. It is up to the individual member states to determine the method of apportionment between these activities.
In this respect the Court confirmed that the method provided under Article 17(5) (or Article 173 of the Directive currently in force) should be applied only to determine the proportion of input VAT for taxable persons involved in the provision of goods/services in respect of which there was a right to deduct input VAT and other goods/services in respect of which there was no such right of deduction.
This is especially relevant for holding companies - the turnover derived from other services which are not be considered taxable activities should not be included in the denominator used to determine the deductible proportion of VAT.

21. Expenses incurred in the issue of shares
In Case C-437/06 (the ‘Securenta Case’) the ECJ confirmed that the link between the economic activity of the company and the expenses on which it incurred VAT is also a requirement with regards to the expenses incurred in the issue of shares.
The Court held that when a taxpayer simultaneously carries out economic activities, taxed or exempt, and non-economic activities outside the scope of the Directive, deduction of the VAT relating to expenditure connected with the issue of shares is allowed only to the extent that such expenditure is attributable to the taxpayer’s economic activity in terms of Article 2(1) of the Directive.
Therefore such costs may be deducted only to the extent that they are considered to be a cost component of the output transactions in respect of which there is a right of deduction.
In another judgment (the Securenta judgment) the ECJ considered the deductibility of input VAT incurred on services acquired in connection with the issue of shares. The Securenta Case involved a holding company which was involved in the acquisition, management and sales of real estate, securities, financial holdings and all types of investments. Securenta acquired the capital required for such transactions by means of the issue of shares and atypical silent partnerships.
The holding company in this case (Securenta) held the view that although the greater part (90% or more) of the total input VAT was not attributable to specific output transactions – all the input tax was deductible because the issue of shares was linked to the reinforcement of the company’s capital – therefore the transaction had benefited the company’s economic activity in general.
The Court held that in this case the expenditure connected with the supplies of services carried out for the issue of shares was not solely attributable to downstream economic activities carried out by Securenta – part of these costs were incurred for the performance of non-economic activities.
On such basis the Court held that such costs may only be deducted to the extent that they are considered to be a cost component of the output transactions in respect of which there is a right of deduction.
The Securenta Case also confirmed the principles established in the Portugal Telecom Case in relation to the apportionment of input VAT between economic and non-economic activities.
In line with the Portugal Telecom case, the ECJ in the Securenta case held that the method of apportionment included in Article 17(5) and the rules of Article 19 (Articles 173 and 174 of the Directive currently in force) do not apply for apportionment of input VAT between economic and non-economic activities. It is in the discretion of Member States to determine the methods of apportionment in such cases.

22. Expenses incurred in the disposal of shares
The ECJ in Case C-29/08 (the “AB SKF Case”) held that a disposal of shares in a company that constitutes a disposal of ‘a totality of assets’ in terms of Article 19 of the VAT Directive is not an economic activity subject to VAT if it satisfies the conditions imposed by the Member State in question in this respect.
In the absence of the abovementioned exemption (applicable to a transfer of a going concern), the disposal of shares by a holding company in a subsidiary is a clear case of an economic activity if:
such holding company was directly involved in the management of the subsidiary by virtue of taxable management activities; and
such disposal was carried out in order to restructure a group of companies with the scope of obtaining income on a continuing basis
The ECJ in the AB SKF Case considered the implications expenses incurred in connection with the disposal of shares in a subsidiary. It analysed the principles of various jugdments (Polysar, Cibo, Floridienne and Berginvest).
The Court determined that no transaction is deemed to have taken place in the case of a disposal of shares in a subsidiary if such disposal constitutes a disposal of a ‘totality of assets’ in terms of Article 19 of the VAT Directive (the Directive which is currently in force) if it satisfies the requirements imposed by the relevant member state in this respect.
However, if the transaction is not exempt in terms of Article 19, it would be a clear case of an ‘economic activity’ if:
such holding company was directly involved in the management of the subsidiary by virtue of taxable management activities; and
such disposal was carried out in order to restructure a group of companies with the scope of obtaining income on a continuing basis.
This conclusion was reached on the basis that such a transaction has 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 person within the terms of established case law (including the Polysar, Cibo and Floridienne and Berginvest judgments).

23. Link with general economic activity for exempt supplies
The AB SKF Case also confirmed that the sale of shares in the case in question should be exempted under Article 135(1)(f) of the VAT Directive (which inter alia exempts transactions, including negotiation in shares).
Another important factor considered by the Court in the AB SKF case (basing itself on the fundamental principle of fiscal neutrality) is that a link between the input costs and a taxable person’s general economic activity may be established even where such person carried out an exempted transaction, as long as the inputs of such supply do not have any effect on the price of the shares but are components of the general cost of the taxable person.
However the Court in this case determined that the transaction is exempt under Article 135(1)(f) of the VAT Directive (transactions, including negotiation but not management or safekeeping in shares…). The Court held that is clear in this case that the sale of shares at issue in the main proceedings is also directly linked to and necessary for SKF’s taxable economic activity – thereby being exempt under Article 135 (1)(f).
A VERY IMPORTANT FACTOR considered by the Court in the AB SKF case is that where there is an exempted supply, it is still possible to establish a link with the taxable person’s general economic activity if the inputs do not have any effect on the price of the shares but are cost components of the overall business.
The Court reached this conclusion after considering the importance of the principle of fiscal neutrality – which is a fundamental principle of the common system of VAT. This principle demands that the same treatment is afforded to similar supplies of services which are in competition with each other.
On this basis, it follows that if the consultancy costs relating to disposals of shareholdings are considered to form part of the taxable person’s general costs in cases where the disposal itself is outside the scope of VAT, the same tax treatment must be allowed if the disposal is classified as an exempted transaction.

24. Concluding considerations
A holding company whose sole purpose is to acquire shares in subsidiaries without involving itself in the management of such subsidiaries is not considered to be a taxable person (Polysar).
Key distinction between ‘mixed’ and ‘pure’ holding companies.
The attribution system under A.17(5) (or A.173 under current Directive) is applicable for apportionment for activities with a right to deduct and activities without such right - not for apportionment between economic and non-economic activities (Portugal Telecom & Securenta).
Link between input costs and the general economic activity may also be established in connection with exempt supplies (AB SKF).
In view of the significant implications at stake all corporate groups should not ignore the various factors affecting their VAT position, particularly the nature of transactions/activities between the holding company and the subsidiary companies.
A couple of short points before closing off:
It is clear that VAT may have significant implications for corporate groups and holding company structures. One must keep in mind the amounts of VAT that may be claimed – which may be very high in the case of holding companies in large corporate groups with significant investments. Holding companies must ensure that their VAT strategy is fine tuned to fit in the fundamental rules of the VAT Directive.
In summary, one must also keep in mind the fundamental points which were analysed in the previous slides - for instance:
Definitely one must not put all holding companies into one basket – a holding company can be primarily set up for the sole purpose of holding shares in other companies (‘pure’ holding companies) or to be engaged in the holding of shares in other companies and the provision of other services (e.g. granting of credit, provision of management services, ect) – (‘mixed’ holding company).
The Cibo judgment and the Portugal Telecom cases confirmed that the attribution system under Article 17(5) (and Articles 173,174 of the current Directive) should only be applied for the determination of the proportion of input VAT between activities conferring the right of deduction and other activities where the right of deduction is not available. The method used to determine the proportion between economic and non-economic activities is at the discretion of the member states – as confirmed in Portugal Telecom and Securenta.
The AB SKF judgment established that in order to ensure that the fundamental principle of fiscal neutrality is respected – the link between input costs and the general economic activity may also be established in connection with exempt supplies – one must not immediately dismiss this link on the basis of the exempt supplies provided by the taxable person.

25. Thank you
David Farrugia
DFK Malta