BDO Indirect Tax News

Spain - Supreme Court to rule on VAT treatment of mixed holding companies and the transfer of shares

Spain’s Supreme Court has agreed to hear a case involving the VAT deductibility rules as they apply to a holding company when it sells shares of a subsidiary to another group company, an issue that has been contentious and has led to different tax treatments.

A holding company is a company whose sole activity is the acquisition and holding of shares in other entities/undertakings (passive holding company), or the provision of taxable management services to those entities/undertakings (active holding company) or the holding of shares in conjunction with the provision of taxable management services (mixed holding company). For VAT purposes, the mere holding of shares does not qualify as an economic activity, so the company is not considered a taxable person and, hence, it is unable to reclaim input VAT paid. However, the mixed company may be able to deduct the input VAT related to the management activity so the VAT will become partially deductible.

The case before the Supreme Court involves a parent company that is part of a group and holds shares and provides management support services to its subsidiaries (a mixed holding company). In its VAT returns, the company deducted all the input VAT incurred. However, during a tax inspection, the Spanish tax administration disallowed the deduction on the grounds that the sale of shares is a “financial activity,” since the costs were directly related to the sale of shares between group companies and, therefore, there is no right to an input VAT deduction. The tax administration cited two types of activity:
  1. Management support services, for which a full VAT deduction is allowed; and
  2. Financial activities, which, as noted above, are exempt from VAT, with no right to a deduction of input VAT on the supply.
The holding company’s right to deduct VAT was restricted: the VAT paid on goods and services for the financial activity could not be deducted because the activities were exempt and the VAT on common expenses should have been partially deductible for the VAT that is proportional to the amount relating to the transactions giving rise to the right to deduct.

The Supreme Court has been asked to rule on the following:
  • Whether the sale of shares, which is generally exempt under the VAT law, should always be categorized as a “financial activity” or whether it could be deemed an ancillary or non-regular financial transaction for purposes of calculating the pro-rata deduction, thereby not limiting the deductibility of VAT; and
  • Whether intragroup share transfers can fall outside the scope of Spain’s VAT law. Specifically, article 7.1 provides that the transfer of an autonomous economic unit capable of conducting business independently is outside the scope of Spanish VAT, with the result that such transactions would be excluded from the pro-rata calculation, thereby not limiting the deductibility of VAT.
Significance of a decision
 A Supreme Court decision on this matter is crucial. In accepting the case, the court acknowledged that previous decisions on the VAT treatment of mixed holding companies apply only in specific circumstances and lack a general framework. The potential restriction on the ability of a group parent company to deduct input VAT due to the transfer of a subsidiary as part of a restructuring poses a significant financial burden, which can have a chilling effect on such transactions, especially given the Spanish tax administration's restrictive interpretation of the right to deduct input VAT, principally in the case of mixed holding companies.

Based on the jurisprudence of the Court of Justice of the European Union, the VAT neutrality principle should guide the deductibility of VAT for mixed holding companies that provide taxable management services to their subsidiaries. The high value of share transfers should not result in such transfers being inherently classified as an independent financial activity; instead, factors such as the resources used for these transactions, their frequency and their link to management activities should be taken into account. Otherwise, a single share sale could significantly limit deduction rights, contradicting the VAT neutrality principle.

The nontaxability of the transfer of an autonomous economic unit capable of independent business activity is designed to facilitate business continuity and minimise costs for the parties involved. If transferring shares in a subsidiary (assuming the business can function independently) is considered nontaxable, this would protect the transferor’s right to deduct input VAT.

Affected holding companies should understand the basic issues relating to the recovery of input VAT and seek professional advice, as needed. Hopefully, the upcoming Supreme Court decision will provide some clarity regarding the ability of holding companies to reclaim input VAT in restructuring transactions.

Álvaro Gómez-Elvira
Alberto Alba Cousillas
BDO in Spain
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