A holding company that actively participates in the management of its subsidiaries is a taxable person and is, normally, entitled to deduct input VAT. When a holding company disposes of shares in one of its subsidiaries, the question arises as to whether the costs incurred should be regarded as having a direct and immediate link with the VAT-exempt transaction or the taxable person’s economic activities.
In previous case law (HFD 2017 ref. 20, in Swedish), the Supreme Administrative Court (SAC) ruled that a holding company was entitled to deduct input VAT on the disposal costs because it had a direct and immediate link with the taxable person’s economic activity as a whole. However, in this case, the holding company carried out external economic activities in addition to managing its subsidiaries.
In the case before the court, the Swedish Tax Agency (STA) had denied the taxpayer the right to deduct input tax since the holding company did not provide any taxable transactions outside the management of its subsidiaries. The company appealed to the SAC, which upheld the STA’s decision. However, the Administrative Court of Appeal agreed with the STA and held that the funds obtained from the disposal of shares did not have a direct and immediate link with the taxpayer’s economic activities.
The SAC granted leave to appeal on the question of whether a parent company, whose sole economic activity is to provide management services to its subsidiaries, is entitled to deduct input VAT on professional services in connection with the disposal of a subsidiary’s shares.
The SAC’s conclusion
The SAC concluded that settled case law from the Court of Justice of the European Union (CJEU) does not support a distinction being made between which type of economic activity that the holding company needs to perform to be able to deduct input VAT. The SAC held that the fact that the holding company's business activity consists of providing management services to its subsidiaries does not, in itself, preclude the holding company’s right to deduct VAT on professional services it incurred in connection with the disposal of the shares.
The SAC further stated that the purpose of the restructuring and the disposal of the shares was to improve efficiency and increase the provision within the remaining operations in the holding company. It was also clear from the circumstances of the case that the profit from the sale was allocated to the head office function of the parent company. Furthermore, it was undisputed that the costs of the share sale could not be passed on to the purchasers of the shares. On the contrary, the SAC considered that the costs could be assumed to be part of the price charged by the holding company to its subsidiaries for the services provided to them.
Hence, the SAC concluded that the costs could be considered to have a direct and immediate link to the economic activity of the holding company, which is a prerequisite for exercising the right to deduct input VAT.
However, the STA had stated that even if the right to deduct VAT as input tax is allowed, the input tax deduction should be restricted due to the exempt sale of shares in the subsidiary and for non-economic activities that the parent company carries out by owning shares in subsidiaries without taking part in the active management.
Since the arguments from the STA had not previously been presented before the court, the SAC referred the case back to the Court of Appeal for further considerations regarding if there should be any limitations on the deduction.
Commentary on the SAC’s decision
The decision is in line with the SAC’s judgment in the case of HFD 2017 ref. 20 and CJEU case law. In its ruling, the SAC has provided clear guidance on the principles allowing a right to recover VAT incurred on the share disposal cost of a holding company that is involved in the management of its subsidiaries.
Since the SAC was restricted by the procedural rules from examining the question in full, there is not yet a final judgment with regard to the size of the deduction. However, the SAC clearly states that it can be assumed that the costs in question were incorporated in the price of the services provided by the company to its subsidiaries. For this reason, in practice, KPMG Sweden believes that the SAC's decision means that there should be no limitation on deduction in this case.
