« …VAT relating to the services at issue cannot be deducted as a result of the choice made by MVM not to charge the members of the group for its management services”. This is what the Supreme Court of the European Union points out in its decision of January 12, 2017 (1). The statement is a quick shortcut but it sums up the issue pretty well and allows to recall that VAT is a parameter to be considered in the same way as profit tax when it comes to allocate the cost within a group. However prudence is well advised when choice to charge is made.
MVW is a commercial company that leases power plants and fibre optic networks as well as being the owner of a number of companies mainly generating or selling electricity. For the purpose of the strategic management of the group it is liable for, MVM bought services for the benefit of the entire group and for each of the members of the group. However none of the services was charged to the subsidiaries and MVM did not impose a general charge on the group for its strategic management. In this context, the Hungarian administration challenged the right to deduct the VAT relating to those services.
As a general rule the sole activity of a holding company is the acquisition of shares in other undertakings. Such an activity is not an economic activity from a VAT point of view and no deduction on the acquisition of goods and services is consequently available. It is different if the shareholding is accompanied by involvement in the management of the subsidiaries. However, such an involvement can be regarded as an economic activity only if it entails carrying out transactions and receiving remuneration.
This is those principles coming from their decisions related to the holding that the Court recall s and in this respect, the present decision is not original except if we note that it is made about a company holding shares but also performing taxable activity.
The court also remind that in order for vat to be deductible, the input transactions must have a direct and immediate link with the output transactions giving rise to a right of deduction. Thus, The right to deduct VAT charged on the acquisition of input goods or services presupposes that the expenditures incurred in acquiring them was a component of the cost of the output transactions that gave rise to the right to deduct.
Effective invoicing appears like a sine qua non condition for considering involvement into the management as economic activity or for demonstrating more generally that the acquisition of input goods and services are component of the cost of output transactions.
As a general rule, attention needs to be paid to VAT impact especially in term of deduction when it comes to run the costs within a group and among others management fees and rebilling. In the same time, it will be advisable to keep in mind that invoicing may transform a pure holding from non taxable person to taxable person. In this respect it will be necessary o envisage all the consequences of this change of VAT status before making the choice to charge costs
(1) Court of justice, ord. 12-1-2017, case. 28/16, 6th ch. MVM Magyar Villamos Müvek Zr