FRANCE - National French High Court applies CJEU Marle Participations Decision
In its decision C-320/17 of 5 July 2018, which we wrote about in the Indirect Tax News of December 2018 (Issue 4), the Court of Justice of the European Union (CJEU) ruled that the letting of a building by a holding company to its subsidiary amounts to involvement in the management of that subsidiary. The effect of that conclusion, according to the CJEU, is that the renting of the building must be considered an economic activity if the following conditions are met:
- The supply of services is made on a continuing basis;
- The supply is carried out for consideration;
- There is a direct link between the supply and the consideration; and
- The supply is not VAT exempt.
The CJEU considered that:
- Expenditure connected with the acquisition of shareholdings in subsidiaries incurred by a holding company that carries out an economic activity has to be regarded as belonging to the holding company’s general expenditures. As a result, the VAT paid by the holding company on such expenditure must, in principle, be deductible in full;
- Expenditure connected with the acquisition of shareholdings in subsidiaries incurred by a holding company that involves itself in the management of only some of its subsidiaries and which does not carry out an economic activity with regard to the other subsidiaries must be regarded as only partially belonging to its general expenditure. As a result, the VAT the holding company paid may only be deducted in proportion to the expenditures that are inherent in the economic activity, in accordance with the apportionment criteria defined by the Member States.
On 19 December 2018 (n° 396945), the French Administrative High Court of Justice (Conseil d’Etat) applied this decision. Indeed, it considered that since the letting of the building and the land for nine years involved receipt of annual rent of €9,000 that was subject to VAT, Marle Participations (the holding company of the Marle Group) must be deemed to be involved in the management of its subsidiary and it is carrying out an economic activity that gives it the right to deduct VAT on the rent.
For expenses incurred related to the acquisition of shareholdings in another subsidiary, since Marle Participations did not contemplate carrying out a taxable economic activity for the benefit of this subsidiary, it could not deduct VAT related to these expenses even if it claimed that this subsidiary’s activities and those of Marle Group complement each other.
This decision is interesting because it extents the meaning of involvement. Indeed, the CJEU had provided a list of activities that could be qualified as economic activities but this list was not exhaustive. Therefore, by adding to the list the letting of a building to subsidiaries, this Court goes further than the CJEU, holding that even a passive activity, such as letting of a building, can be deemed to be involvement in the management of a subsidiary.
But, the practical significance of this decision is limited because the French Administrative High Court of Justice was strict about limiting the right to deduct VAT. The French Court set out the conditions that must be met when allocating the expenditures incurred.
The French Court said that a participation accompanied by a direct or indirect involvement in the management of companies in which shareholdings are held, by the setting up of operations subject to VAT, can be deemed an economic activity. In this case, VAT is deductible:
- Where input operations carried out have a direct and immediate link with the output operations giving rise to the right to deduct VAT; or
In the absence of a direct and immediate link between a particular input operation and one or many output operations giving rise to the right to deduct VAT, where costs involved are part of the taxable person’s general expenses and are therefore inherent in the price of goods or services provided by the taxable person.
Rebecca Afana Elanga