Indirect Tax News - July 2022

AG opines input VAT incurred on services contributed free of charge to a subsidiary is nondeductible

Advocate-General (AG) Pitruzzella of the Court of Justice of the European Union (CJEU) issued his opinion on 3 March 2022 determining that a holding company may not recover input VAT incurred on a taxable supply of services contributed free of charge to its subsidiaries and used for VAT-exempt activities of the subsidiaries (Finanzamt R v W-GmbH). The CJEU still must issue its decision in the case.


W-GmbH is a German holding company with majority participations in two limited partnerships that are primarily engaged in real estate development. For the most part, the limited partnerships carry out services that are exempt from VAT, so they have little or no right to deduct VAT on costs incurred. To raise capital for new projects of the companies, W-GmbH purchased services from a third party and contributed those services (valued at EUR 9.4 million and EUR 30.26 million) to the limited partnerships. Another agreement was concluded at the same time, under which W-GmbH would provide administrative and management services to the limited partnerships for a fee. The latter services are subject to VAT, giving W-GmbH a right to deduct VAT.

W-GmbH fully deducted all of the VAT incurred on the services that it contributed to the limited partnerships based on the fact that it provided taxable administrative and management services. However, following a tax audit, the German tax authorities determined that W-GmbH’s contributions for the benefit of the two limited partnerships should be classified as non-VATable activities to the extent they did not generate revenue within the meaning of the turnover tax legislation and, therefore, were not attributable to the holding company’s commercial activities and the services were used by the limited partnerships for VAT-exempt activities. As a result, input VAT paid in respect of those activities could not be deducted. W-GmbH appealed to the German Finance Court of Lower Saxony, which reversed the decision of the tax authorities; the tax authorities then appealed to the Federal Finance Court, which referred case to the CJEU.

AG opinion

AG Pitruzzella first determined that W-GmbH is not a pure holding company but rather a taxable person for VAT purposes as it was providing taxable administrative and management services to the limited partnerships for a fee. In addition to qualifying as a taxable person, to deduct input VAT, there also must be a link between the transactions and (in this case) the holding company’s economic activities. According to the AG, W-GmbH is not entitled to deduct input VAT on the contributed services because the services were not directly and immediately related to W-GmbH's specific services (administrative and management services) or to its general economic activities. The services are exclusively related to partnerships’ real estate activities, which to a large extent are exempt from VAT. In addition, the AG took the position that the particular arrangement appears to have been designed to create a right to a VAT deduction by W-GmbH where there is no such right at the level of the partnerships. In fact, because of their VAT-exempt activities, the partnerships would not have been able to deduct VAT even if the services had been purchased directly.


The ability of holding companies to recover input VAT has been a recurring issue before courts in the EU member states and the CJEU.

Should the CJEU follow the AG’s opinion, tax authorities throughout the EU likely will be alert to situations in which holding companies incur costs that arguably belong to a subsidiary. Potentially affected taxpayers should consider the following actions to reduce the chance of future challenges:

  • Ensure that the holding company is a VAT entrepreneur. This will be the case if the holding company permanently provides services to each of its subsidiaries for a fee (the type of services is irrelevant). If this is not the case, the holding company will only qualify as a partial VAT entrepreneur and, therefore, it will only be able to take a partial deduction (i.e., VAT paid on purchases of non-VATable or exempt items will not be deductible).
  • If a holding company deducts VAT on costs incurred, ensure there is a sufficient direct and immediate link between the costs incurred and the holding company’s activity that consists of acquiring, holding and selling shares and providing the above services, and that sufficient documentary evidence exists to demonstrate this fact.
  • Describe precisely in the articles of association and in any relevant agreements with the subsidiary the activities the holding company carries out (on behalf of the subsidiaries). Continue to monitor whether the holding company's activities correspond to what is included in the articles of association and/or agreements, and amend these documents as needed.
  • If costs are being passed on, ensure there is an agreement on the basis of which the holding company purchases certain goods or services for the subsidiary.
  • If the relevant costs belong to the subsidiary rather than the holding company, do not deduct the VAT; the invoice should be issued in the name of the party for whom the costs are intended so that party can deduct the VAT on the basis of its right to a deduction (provided the other party can be regarded as the recipient of the supply).   

Madeleine Merkx

Marco Beerens