Flashback on ECJ Cases C-16/00 (Cibo Participations) – Costs connected to the acquisition of a shareholding in a subsidiary forms part of its general costs are deductible

On September 27, 2001, the ECJ issued its C-16/00 (Cibo Participations).

Context: Sixth VAT Directive – Economic activity – Involvement of a holding company in the management of its subsidiaries – Deduction of VAT charged on services purchased by a holding company in the context of the acquisition of a shareholding in a subsidiary – Receipt of dividends by a holding company

Article in the EU VAT Directive

Artciles 4(2) and 17(2) of the Sixth VAT directive (Article 9 and 169 of the EU VAT Directive 2006/112/EC).

Article 9
1. “Taxable person” shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity. Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as “economic activity”. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.
2. In addition to the persons referred to in paragraph 1, any person who, on an occasional basis, supplies a new means of transport, which is dispatched or transported to the customer by the vendor or the customer, or on behalf of the vendor or the customer, to a destination outside the territory of a Member State but within the territory of the Community, shall be regarded as a taxable person.

Article 169 (Right to deduct VAT)
In addition to the deduction referred to in Article 168, the taxable person shall be entitled to deduct the VAT referred to therein in so far as the goods and services are used for the purposes of the following:
(a) transactions relating to the activities referred to in the second subparagraph of Article 9(1), carried out outside the Member State in which that tax is due or paid, in respect of which VAT would be deductible if they had been carried out within that Member State;
(b) transactions which are exempt pursuant to Articles 136a, 138, 142 or 144, Articles 146 to 149, Articles 151, 152, 153 or 156, Article 157(1)(b), Articles 158 to 161 or Article 164;
(c) transactions which are exempt pursuant to points (a) to (f) of Article 135(1), where the customer is established outside the Community or where those transactions relate directly to goods to be exported out of the Community.

Facts

Cibo is a holding company which owns significant shareholdings in three undertakings specialising in bicycles. It was created by the company Compagnie d’importation des laines (CIL), its majority shareholder.
It is apparent from the judgment of the Administrative Court, Lille, that Cibo has challenged before that court a demand to pay VAT arising from the refusal of the tax authorities to allow Cibo to deduct VAT, for the period from 2 November 1993 to 31 December 1994, in respect of the supply of various services for which it was invoiced by third parties in connection with the acquisition of shares in its subsidiaries. The services in question included the auditing of the companies, assistance with the negotiation of the purchase price of the shares, organising the take-over of the companies and legal and tax services.
In support of its application for deduction of VAT, Cibo has pointed out that its chairman became the chairman of the three subsidiaries, that it provides services to those subsidiaries against payment, that CIL makes available, against payment, qualified staff to work in its subsidiaries in general, administrative, financial, commercial and technical management, and that the subsidiaries were invoiced for those services on a flat-rate basis of 0.5% of their turnover. Cibo maintains that it is thus involved in the management of its subsidiaries and that, consequently, the expenditure linked to its acquisition of shares falls within the scope of VAT as general expenses, given that it pertains to the holding company’s general business.
According to the national court, the French tax authorities reply that Cibo derives most of its turnover from the receipt of dividends. Moreover, it conducts no commercial transactions in its own name and the companies within the group remain legally independent. Apart from its financial role, Cibo does no more than act as consultant and direct group policy, in respect of which it receives remuneration. The French authorities submit that, consequently, Cibo is neither directly nor indirectly involved in the management of its subsidiaries. The expenditure arising from its acquisition of shareholdings has no connection with the services which it provides to its subsidiaries. It merely relates to its ownership of shares and receipt of dividends, which fall outside the scope of VAT.
In the event that Cibo were nevertheless to be regarded as being involved in the management of its subsidiaries, the French tax authorities maintain that the dividends must be associated with the company’s economic activity and thus with its income falling within the scope of VAT, but that, given that they are exempted in accordance with Article 13B(d) of the Sixth Directive, a pro-rata deduction should be made.

Questions

1. What are the criteria for establishing involvement? Can it be inferred from the provision of paid services or the running of a group of companies by its holding company, or de facto management precluding independence on the part of a subsidiary, or some other factor?

2. Where there is involvement, does the receipt of dividends remain outside the scope of value added tax for any reason other than economic activity, in that such receipts are not the consideration for the supply of goods or services or, having regard to the fact that expenditure is incurred in connection with the acquisition of shares the direct purpose of which is to enable participation in economic activity, do dividend receipts fall within the scope of value added tax and, if so, are they exempt under Article 13B(d)(1) of the Sixth Directive or taxable?

3. If the receipt of dividends does remain outside the scope of value added tax, what are the implications for the right to deduct:

– does no right remain to deduct tax on expenditure incurred in acquiring shares, given that that expenditure does not relate to a taxable transaction,

– or is deduction allowed under the heading of general costs?

AG Opinion

(1) There is involvement of a holding company in its subsidiary where, in addition to exercising its shareholder rights, the holding company also carries out for its subsidiary economic activities within the meaning of Article 4(2) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, entailing the carrying out of activities which are subject to value added tax under Article 2 of the Sixth Directive.

(2) The receipt of dividends distributed by a subsidiary to a holding company falls outside the scope of the Sixth Directive, because the dividends do not amount to consideration for transactions involving the supply of goods or services. Nor, therefore, can they be exempt from tax by virtue of Article 13B(d)(5) of the Sixth Directive.

(3) If the receipt of dividends falls outside the scope of the Sixth Directive, the deduction of input tax in respect of costs for the acquisition of shares is excluded in the absence of a direct and immediate link with taxable transactions, unless the taxable person proves by means of objective evidence that that expenditure forms part of the cost components of a transaction giving rise to a right to deduct.

Decision

1. The involvement of a holding company in the management of companies in which it has acquired a shareholding constitutes an economic activity within the meaning of Article 4(2) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, where it entails carrying out transactions which are subject to value added tax by virtue of Article 2 of that directive, such as the supply by a holding company to its subsidiaries of administrative, financial, commercial and technical services.

2. Expenditure incurred by a holding company in respect of the various services which it purchases in connection with the acquisition of a shareholding in a subsidiary forms part of its general costs and therefore has, in principle, a direct and immediate link with its business as a whole. Thus, if the holding company carries out both transactions in respect of which value added tax is deductible and transactions in respect of which it is not, it follows from the first subparagraph of Article 17(2) of the Sixth Directive 77/388 that it may deduct only that proportion of the value added tax which is attributable to the former.

3. The receipt of dividends does not fall within the scope of value added tax.

Summary

The involvement in the management of the affiliates is to be regarded an economic activity, being VAT relevant.
The involvement of a Hldg Co in the management of companies in which it has acquired a shareholding constitutes an economic activity where the respective activities are VAT relevant acc. to Art.2 EU VAT Dir. (e.g. administrative, financial, commercial and technical services)
Costs incurred by purchasing services in the context of acquiring that shareholding are directly related to the economic activities.
- Respective Input VAT is recoverable.
The receipt of dividends is not related to the economic activities and does not fall within the scope of value added tax.
- Input VAT is such a mixed entity is partially recoverable – (Pro-rata rate calculated, not considering the dividends)
In case of Holding Co in your countries you should-reflect whether those are pure holdings/ passive holdings
-> non-taxable person, non-deductibility

-or whether there are other activities that could constitute business activities,

-if your local rules automatically results in a registration need for VAT purposes or if this requires a conscious decision

-and if a Pro-Rata rate is to be calculated for Input VAT recovery

-> enabling (partial) VAT deductibility