Recently, the EU Court of Justice (hereinafter referred to as ' ECJ') ruled in the Hungarian MVM-case (*1) whether an active holding company is fully entitled to deduct the input VAT on costs. The situation that had been referred to the ECJ by the Hungarian Supreme Court concerned a holding company which, in addition to active involvement in the management of the subsidiary companies, also carried out entrepreneurial activities. The holding company didn’t charge compensation for the management activities performed by the holding company for its subsidiaries. This situation is not previously submitted to the ECJ and may have significant impact to the Dutch practice. In particular, the value of the well-known 'holding' resolution is unclear more then ever. Below we will discuss the aforementioned case further.
1. Current situation
MVM is established in Hungary and rents power stations and optical fiber networks. For these activities, MVM qualifies as a VAT entrepreneur. In addition to the entrepreneurial activities MVM holds the shares in various subsidiaries and is responsible for the overall strategic management of the MVM group. MVM charges no fee for these strategic management services delivered to the group entities. The VAT charged on legal services, company management and PR-services delivered to MVM is fully reclaimed by MVM on its Hungarian VAT return. These costs relate to the entrepreneurial activities of MVM andto the (individual members of the) group.
The Hungarian tax authorities disputed the full VAT deduction of MVM, which ultimately resulted in the following questions to the ECJ. Firstly, the Hungarian Supreme Court wanted to know whether MVM qualifies as VAT entrepreneur for the (unpaid) management services delivered to its subsidiaries. Secondly, it is requested whether MVM has the right to fully deduct the input VAT on costs while acting as an active holding company and under what circumstances and conditions could MVM exercise that deduction right.
2. Decision ECJ
The interference in the management of the subsidiaries, without receiving compensation doesn’t lead to an economic activity according to the ECJ. In other words, for this activity MVM does not qualify as a VAT entrepreneur and falls out of the scope of VAT as a consequence. The next question is whether the VAT on the costs related to this management is excluded from deduction. This depends, among other things, whether the costs relate directly and immediately to MVM's economic activity. In case the costs are part of the general costs of MVM and are included as such in the rental price of the power stations and optical fiber networks, the VAT on costs related to the entire economic activity is fully deductible. In MVM’s case, the ECJ mentions that it is not conceivable that this link is there, but refers to the local Hungarian Court for further investigation. In case the research of the local Hungarian judge determines that the costs charged to MVM relate to both economic and non economic activities, the VAT on the costs is recoverable through the so-called ' pre-pro rata’. The way this allocation needs to be made, is left to the Member States.
3. Dutch practice
Dutch holding companies that perform economic activities next to their shareholding activities can benefit from the Dutch Holding resolution (*2). These holding companies are given a full VAT deduction in case the holding company performs VAT taxable activities. The deduction is not limited to holding activities. The resolution dates from the early 1990’s and applied without any problems on the VAT position of holding companies. However lately discussion arised on the interpretation of the resolution with the Dutch authorities . Based on MVM’s ECJ decision, we expect that the previously announced amendment to the resolution will be made sooner rather then later.
4. What’s next?
If you have to deal with a holding company or any other group company that holds shares in group companies in addition to a material enterprise , we recommend to check the VAT position in the light of MVM and the changed handling of the holding resolution.
If you have any questions according to the above, please do not hesitate to contact me j.zijlstra@banning.nl
(*1) Hof van Justitie EU (C-28/16), MVM Magyar Villamos Művek Zrt., ECLI:EU:C:2017:7
(*2) 18 februari 1991, nr. VB91/347
