Analysis: “Do mixed holding companies have the right to deduct the input VAT paid when changing the initial intended use of the acquired services?” by Jordi Sol
On 12 November 2020, the Court of Justice of the European Union (CJEU) ruled that the actual use of acquired services prevails over the initial intention for the purposes of the right to deduct for a mixed holding company. Under this approach, the input VAT paid on services by a mixed holding company to carry out exempt transactions although the initial intention was to provide VAT taxable transactions (management services to its subsidiaries) is not deductible.
In the first question, the CJEU confirms the nature of preparatory activities as being economic activities in and of themselves, hence conferring on Sonaecom the status of taxable person. Moreover, the CJEU pointed out that the right to deduct should be granted to Sonaecom, as long as there is objective evidence that the input VAT paid for the services received relating to a market study with the purpose to acquire shares in other companies aims to provide those companies with management services (taxable to VAT). This arises at the time when the tax becomes chargeable, namely when the services are received. The expenditure on the acquisition of those services must be regarded as belonging to Sonaecom’s general costs, hence, the input VAT should be deducted in full, unless Sonaecom would be performing certain VAT exempt economic activities, in which case the right to deduct should be subject to the rules of proportional deduction.
The second question deals with the VAT consequences, in the area of the right to deduct, when a mixed holding company decides to change its intentional use. In the case at hand, Sonaecom paid input VAT on a bank commission for organising and putting together a bond loan, intended to provide to its subsidiaries the necessary means to make investments and right after supplying them with the necessary management services (VAT taxable transactions). However, Sonaecom changed its initial intention and finally used those bank services to deliver VAT exempt financial transactions (namely an injection of money to the parent company in the form of a loan). In this case, the CJEU takes the view that the deduction of input VAT must be adjusted as precisely as possible to the actual use in order to avoid unjustified benefits or prejudice benefits for the taxable person. Consequently, an actual use of goods and services takes precedence over the initial intention. Having this in mind, the CJEU does not accept the argument of Sonaecom that, although there is no direct link between the costs incurred for the issue of the bond loan and a taxed output transaction, those costs should be deductible as general costs of the company, since there is a direct and immediate link between the upstream services purchased by Sonaecom and an exempt output transaction.
This judgment ratifies settled CJEU case law (among others, Ryanair C-249/17 and Marle Participations, C-320/17) covering cases of preparatory activities and abandoned projects. Moreover, when dealing with the second question, the CJEU takes the position that the right to deduct remains provisional until the actual use of the services takes place – does this mean that the statute of limitation period starts running from this moment despite the right to deduct being able to be exercised immediately from the moment the services originating the input VAT are actually supplied?
The Opinion is accessible here.
The judgment is available here.
Jordi Sol is an International VAT consultant and founder of VATinsights.