HMRC can group non-taxable holding companies with their subsidiaries for VAT purposes, CJEU confirms

In its judgment, the CJEU closely followed its own reasoning in a recent decision involving tax authorities in the Republic of Ireland.

The VAT Directive (118-page / 475KB PDF) creates an exception to the general rule that taxable 'persons' should be treated separately when calculating their tax liability if they are established in the same state and "closely bound" by "financial, economic and organisational" links. The European Commission had argued that this rule should not allow member states to treat taxable and non-taxable companies, such as holding companies, as a single entity.

"This is a sensible judgment by the CJEU clearly aimed at facilitating business and recognising the complex structure of many modern enterprises," said Darren Mellor-Clark, an indirect tax expert with Pinsent Masons, the law firm behind Out-Law.com. "The UK was strongly supported in its view by Ireland, Denmark, Finland and the Czech Republic."

"The judgment will come as a relief to holding companies in particular and is a welcome end to a period of uncertainty," he said.

The European Commission had brought a number of cases against member states including the Republic of Ireland, UK, Czech Republic, Denmark, Sweden and the Netherlands. These companies use the provision to group holding companies, which are exempt from VAT because they do not carry out trading activities directly, with their subsidiaries.

The Commission had argued that this practice could, in principle, allow a VAT group to be made up of only non-taxable persons, and that allowing non-taxable persons to form part of a VAT group gave them advantages which are not available to non-taxable persons that are not part of a VAT group.

Referencing its earlier decision, in which it held that tax authorities in the Republic of Ireland were entitled to consider a non-taxable company as part of a VAT group, the CJEU said that it was "not apparent" from the wording of the Directive that groupings could not include non-taxable companies.

"It is apparent from the wording of the first paragraph of Article 11 of the VAT Directive that that directive permits each member state to regard a number of persons as a single taxable person if those persons are established in the territory of that member state and if, although they are legally independent, they are closely bound to one another by financial, economic and organisational links," the CJEU said.

"The application of that article is not, according to its wording, made subject to other conditions, in particular to the condition that those persons could themselves, individually, have had the status of a taxable person within the meaning of [the VAT Directive]. As it uses the word 'persons' and not the words 'taxable persons', the first paragraph of Article 11 of the VAT Directive does not make a distinction between taxable persons and non-taxable persons," it said.