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CJEU advised to allow holding companies to be included in corporate groups for VAT purposes

National tax authorities should be allowed to group taxable and non-taxable entities together for VAT purposes, according to a top EU legal adviser.30 Nov 2012

Advocate General Jaaskinen (the AG) published an opinion stating that the practice did not infringe the VAT Directive or any other EU principle, in response to a case brought by the European Commission against Ireland. The Commission is pursuing similar cases against the UK, Czech Republic, Denmark, Finland, Sweden and the Netherlands.

The Court of Justice of the European Union (CJEU), which is the EU's highest court, asked the AG to produce a single opinion ahead of its judgments as the same point is at issue in each of the cases. Its judgments are expected in 2013. An AG's opinion is not binding on the CJEU, however judges use the opinions in making their decisions and they tend to be followed in the majority of cases.

EU law generally provides that taxable 'persons', including companies as well as people, should be treated as separate units. 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.

Tax authorities in Ireland, amongst other member states, use this provision to group individual corporate entities together with their holding companies for the purposes of charging VAT. Holding companies are exempt from VAT because they do not carry out trading activities directly. However, they can hold assets on behalf of their subsidiaries, and can therefore be liable if one of the subsidiary companies becomes insolvent.

Challenging this practice, the European Commission has said that the exception should be construed narrowly. The reference to "persons" should be read as a reference to taxable persons. It has expressed concerns that the exception could, in principle, allow a VAT group to be made up of only non-taxable persons. It has also argued that allowing non-taxable persons to form part of VAT group gives them advantages which are not available to non-taxable persons that are not part of a VAT group.

In his opinion, the AG dismissed these concerns as "hypothetical" and "not pertinent". All supplies between non-taxable entities fall outside of the scope of VAT whether the entities form part of a VAT group or not, he said. He added that if the law had intended that the reference to "persons" be interpreted as a reference to 'taxable persons', this would have appeared in the Directive as it had done in previous Directives. Tax authorities and taxable persons were entitled to rely on the "clear wording" of the Directive otherwise, he said.

Tax expert Ian Hyde of Pinsent Masons, the law firm behind, said that if the opinion was followed by the CJEU it would be good news for UK VAT groups. HM Revenue and Customs (HMRC) operates rules similar to those of the Irish tax authorities.

"Including dormant companies in VAT groups makes a lot of commercial sense and isn't an avoidance risk," he said. "If the UK rules were found to be non-compliant this would be a real headache for holding companies in particular, and could lead to irrecoverable VAT in a group that shouldn't really have a VAT problem. This would force groups to incur costs restructuring simply to avoid costs being incurred by holding companies."