Holding companies can be considered part of a corporate group for VAT purposes, says CJEU

In its judgment, the CJEU said that there was nothing in European VAT laws preventing the practice, which is used in various EU member states to allow tax authorities to group corporate entities together with their holding companies for the purposes of charging VAT. The court said that it was enough that the companies were established in the same member state, and were closely linked.

"It is apparent from the wording of [the rules] that that directive permits each Member State to regard a number of persons as a single taxable person if they 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 in its judgment.

"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 rules]," it said. "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."

EU law generally provides that taxable 'persons', including companies as well as people, should be treated separately when calculating their tax liability. Article 11 of the VAT Directive (118-page / 475KB PDF) creates an exception to this rule which allows EU member states to regard independent "persons" established in that state as a "single taxable person" providing that they are "closely bound" by "financial, economic and organisational" links.

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 countries 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.

Darren Mellor-Clark, a VAT expert at Pinsent Masons, the law firm behind Out-law.com said "The CJEU’s decision will be a relief for corporate groups. The administrative and substantial benefits in VAT grouping so called 'non taxable persons' such as holding and dormant companies were at risk in these proceedings. For once the UK, with other member states, was on the side of the taxpayer."

"Groups are likely still have to factor in non business activities in a calculation to arrive at an initial restriction of input tax incurred by holding companies and similar, prior to undertaking (if relevant) a partial exemption calculation using the ratio of taxable and exempt supplies across the group. Although this will, effectively, allow tax authorities two bites of the cherry to reduce input tax recovery, it should still produce a better result than if VAT grouping were absolutely denied." Mellor-Clark said.

In its submission to the CJEU, the Commission said that its interpretation of the law "must prevail in view of its context, its objectives and the case law of the Court". However, the CJEU said that it was "not evident" that the actions of the national tax authorities "ran counter" to the previously stated objectives of the EU legislature. It was "apparent" from explanatory notes that the rules were intended to "ensure that member states would not be obliged to treat as taxable persons those whose 'independence' is purely a legal technicality", it said.

"It is, on the contrary, conceivable that, as Ireland and the interveners have submitted, the presence, within a VAT group, of such persons contributes to administrative simplification both for the group and for the tax authorities and makes it possible to avoid certain abuses, and that that presence may even be indispensable to that end if it alone establishes the close financial, economic and organisational links which must exist between the persons constituting that group in order for it to be regarded as a single taxable person," the CJEU said.

"In addition, it must be pointed out that, if such a possibility might itself give rise to abuse, the second paragraph of [the rules] permits Member States to adopt any measures needed to prevent tax evasion or avoidance through the use of the first paragraph of Article 11," it said.

Mellor-Clark said the UK is awaiting CJEU judgment on the same issue, due on 25th April "with the outcome widely expected to follow today's decision and support the current UK position.”