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In this edition of our News Flash, we present a case recently decided by the European Court of Justice (ECJ), which concerns the application of the right to deduct VAT from services that were the subject of a non-monetary contribution by a partner to subsidiaries.
In judgment C-98/21 from 8 September 2022, the ECJ deals with the question, whether a managing holding company that provides taxable output services in the form of management and accounting services to its subsidiaries has the right to deduct tax from the services which are received from third parties. These services are contributed to subsidiaries for a share in the general profit.
The judgment concerns the German company W, which through VAT returns deducted the entire VAT amount paid on the input from transactions. These transactions were subsequently put as a non-monetary contribution by the partner to subsidiaries, as well as transactions related to the provision of accounting and management services for consideration.
The German tax authority refused to recognize the right to deduct input VAT, arguing that the amounts paid as input VAT in connection with the partner’s non-monetary contribution to the subsidiaries due to their gratuitous nature, do not constitute the subject of a commercial exchange and should qualify as non-taxable activities, from which do not have the right to claim VAT deduction.
The case reached the Federal Court of Germany, which decided to suspend the proceedings and ask the ECJ preliminary questions related to the holding company’s right to deduct input VAT from transactions, which the holding puts in subsidiaries for a general profit share. However, these fulfilments are not directly related to taxable transactions provided to subsidiaries and do not belong to the general cost elements of the holding company’s own economic activity.
According to the ECJ, what conditions need to be considered when applying VAT deduction in the case of holding company activities?
In the given case, the ECJ states that the holding company, which carries out output transactions in favour of its subsidiaries (management and accounting services) does not have the right to deduct input VAT from fulfillment procured from third parties, which are then put into subsidiaries for a share in total profit. This applies if:
In the judgment, the ECJ again emphasized the necessity of a connection between input transactions with output transactions. The argument of insufficient proof of this connection with output transactions is increasingly becoming a reason for additional tax collection in the case of tax controls. You can read about practical problems related to tax controls in our previous news.