The dispute over the deductibility of input VAT for a functional holding is entering the next round. The issues in dispute must now be clarified by the European Court of Justice (ECJ).
A pure financial holding whose sole purpose is to acquire and hold company shares is not an entrepreneur from a VAT point of view and is therefore not entitled to deduct input VAT.
The situation is different, however, with a so-called functional holding company, which intervenes directly or indirectly in the management of its corporate participation. A functional holding company regularly provides administrative or commercial services. In this case, the holding company qualifies as an entrepreneur under VAT law and is generally entitled to deduct input VAT from the services it has purchased.
Unlike the rest of corporate tax law or international tax law, VAT is a type of tax that practically requires no creativity from tax advisors. In the case of the input VAT deduction for holding companies, however, a structure was also possible in exceptional cases for VAT. By cleverly interposing a functional holding company, the VAT deduction, which a pure financial holding company is denied, could be obtained.
In a dispute, the Federal Fiscal Court (BFH) now had to decide on the input tax deduction of a management holding company. In a so-called request for a preliminary ruling, the Federal Finance Court submitted two questions to the ECJ on February 15, 2021, according to the ECJ’s notification of March 3, 2021.
First of all, the BFH asks whether the functional holding company is also entitled to an input VAT deduction from purchased services if these purchased services are not directly and directly related to the holding company’s own sales but to the activities of the subsidiary. If the ECJ affirms the input tax deduction for the functional holding company in this case, the BFH asks the second question whether the interposition of the functional holding company is to be viewed as an abuse of law, since the subsidiary would not be entitled to input tax deduction even if the service was directly supplied.
Due to the high practical relevance, the decision of the ECJ is eagerly awaited. Should the ECJ decide that the functional holding company is not entitled to deduct input VAT in such cases, this would be a heavy blow to Germany as a holding location.
Please contact us as your experts for corporate tax law in case of any questions to this VAT issue. Please find further information to VAT here on our website. In case of any questions to corporate tax law please do not hesitate to contact us.
Christian Dobner | TLI Steuerberater