Update: Input VAT deduction of a management holding: advocate general seeks to overturn "intermediary model” - opinion C-98/21

Plaintiff makes shareholder contributions instead of charging for supplies

The plaintiff held interests in two companies that carried out residential construction projects and sold most of the residential units VAT exempt. Therefore, they were not entitled to input VAT deduction from input supplies purchased for this purpose. The plaintiff provided VAT-taxable accounting and management services to the subsidiaries. The holding company purchased input supplies required by the companies and claimed the input VAT deduction. It did not charge these to the companies as supplies but made (non-taxable) shareholder contributions in this respect. As a result, the companies did not incur any non-deductible input VAT. Further details on the referral of the Federal Fiscal Court can be found here.

No connection between input supplies and taxed turnover of the holding company

The advocate general has concluded that the input supplies received by the holding are not directly and immediately related to its taxable supplies to the participations. In doing so, the advocate general refers to the concept of the exclusive origin developed by the ECJ. This had been the non-taxable shareholder contribution, which in turn, by its very nature, served to generate dividends and thus a non-economic activity.

The advocate general also dealt with the ECJ case law, according to which costs for the acquisition of a participation are considered part of the general costs of the holding company and as such may provide entitlement to input VAT deduction. However, this case law is not transferable to the present case, since the input supplies did not serve the acquisition of the participations, but rather the shareholder contribution.  However, the ECJ considerations in the Sonaecom case (12 November 2020, C-42/19) are transferable, according to which the input VAT deduction is based on the output supplies into which the input supplies are actually incorporated. In this case, these were the VAT exempt real estate supplies of the participations. It also follows from the judgement in the Vos Aannemingen case (1 October 2020, C-405/19) that the direct and immediate connection with own output transactions is interrupted if the input transactions are directly and immediately connected with output transactions of a third party.

All in all, the holding company would not be entitled to input VAT deduction even if the relevant provisions of the VAT Directive were applied.

Input VAT deduction would also be a misuse

In its referral, the BFH also asked whether - if, in principle, the input VAT deduction were to be granted - the claim would be a misuse. Although the advocate general already denied the input VAT deduction based on the provisions of the VAT Directive, the AG also addresses the question of misuse by stating that purely artificial arrangements, devoid of any economic reality, whose sole purpose is a gaining tax advantage, are prohibited. To be objectively considered misuse, therefore, the tax advantage sought (here: the input VAT deduction) would have to be counter to the objectives (here: those of the VAT Directive with the system of input VAT deduction). The advocate general affirmed this, pointing to the fact that the companies would not have had any input VAT deduction if:

• the holding company would not have made a shareholder contribution, but would rather have charged the supplies as such on a regular basis
• the companies would have procured the required supplies themselves from the outset
• the holding company would have paid the shareholder contribution with money rather than by contributing supplies, and the companies would have used this money to pay for the supplies they themselves had procured

On the subjective side, misuse requires that the taxable person intends to use this arrangement to gain a tax advantage. The advocate general emphasises that the tax advantage does not have to be the only purpose, i.e., it may also be a misuse if the taxable person also has non-tax motives for this arrangement. An arrangement demonstrates misuse if the tax reasons outweigh the other reasons. However, it is up to the Federal Fiscal Court - as the referring court - to determine this and come to a conclusion. This would only be necessary, however, if the input VAT deduction is affirmed in the first stage.

Use of the intermediary model is becoming ever more precarious

In the case of companies not entitled or not fully entitled to an input VAT deduction, the intermediary model has so far appeared to be a way to get the missing input VAT deduction. As the advocate general has also pointed out, the non-taxable shareholder contribution of supplies was the only feasible way, because if the holding company simply passes on the purchased supplies, a non-deductible input VAT arises in exactly the same way as in the case of an own purchase of supplies by the company not entitled to a deduction.

In its referral, the BFH also argued that an input VAT deduction obtained in this way would be contrary to the system - which is correct in our view.  We expect that the ECJ will agree with the advocate general's opinion and that the BFH will subsequently also deny the input VAT deduction. Holdings in comparable situations must therefore be prepared for the input VAT deduction to be denied. 

The BFH had also granted suspension of execution in another case with regard to the referral discussed here (decision of 30 March 2021, published on 5 August 2021, V B 63/20). There, the facts of the case were somewhat different, as the input supplies received from the holding company (for which the input VAT deduction was granted) served to claim compensation for a loss in value of the participation. Nevertheless, in our view, the advocate general's reasoning could be applied to this case as well, as here too the input supplies received do not have their exclusive origin in taxed transactions. If the ECJ rules in favour of the advocate general, it remains to be seen whether the BFH will also apply these principles in the suspended proceedings.

(Dated: 25 April 2022)