Skip to main content

VAT Deductability for Holdings Companies

In July 2019, Irish Revenue published their much anticipated Tax and Duty Manual on “VAT Deductibility for Holding Companies”. Being one of the most complicated and litigated areas of VAT legislation, as demonstrated by the seventeen pages of guidance; the manual is nevertheless a welcome starting point for holding companies when interpreting the fundamental legislation and the multitude of CJEU case law that must be considered.

The General Rules

The guidance starts by setting out the general VAT deductibility rules as, of course, these are the crux of any VAT recovery decision. The general rules are:

  • VAT incurred on costs which have a direct and immediate link to a business’ taxable transactions or qualifying activities (i.e. certain VAT exempt activities which give a right to deduct) are fully deductible on the basis that such costs are a cost component of those taxable transactions/qualifying activities.
  • Conversely, VAT on costs which have a direct and immediate link to transactions, or activities, which are not taxable, are wholly non-deductible.
  • However, even if costs do not have a direct and immediate link to transactions or activities that give a right to deduct, there can be an entitlement to deductibility. This is possible where it can be shown that such expenditure are general costs of the business’ economic activity as a whole, and as such, are cost components of the price of the taxable goods and services supplied.

The guidance clarifies that the term “direct and immediate link” which is the basic test of a right to entitlement is interchangeable with the term “use”. Therefore, when determining whether a cost has a direct and immediate link with transactions/activities for VAT deductibility purposes it’s necessary to consider how these costs have been used.

Share Acquisition Costs for Holding Companies

The manual splits the VAT recovery rules for share acquisition costs based on the three types of holding company structure.

1. Passive Holding Companies

The purpose of passive holding companies is solely to acquire and hold shares, an activity which by itself, and as established in settled case-law, is not an economic activity for VAT purposes and as such does not grant a right to deductibility of VAT. As the only income derived from the passive holding of shares is dividends which does not fall within the scope of VAT, passive holdings companies are not entitled to recover VAT on share acquisition costs.

This CJEU confirmed this position in the judgement in Cibo (C-16/00) where it held that a holding company whose sole purpose is to acquire shares in undertakings and which does not involve itself directly or indirectly in the management of those undertakings is not considered to be a taxable person for VAT purposes and as such has no right to deduct VAT incurred.

2. Active Holding Companies

By contrast, active holding companies acquire shareholdings and involve themselves in the management of those acquired undertakings by providing a range of management services. Active holding companies are considered to be carrying out an economic activity for VAT purposes.

Generally the range of management services provided consists of administration, accounting, financial, commercial, IT services but Revenue confirm in their guidance that the list of services which can fall within this category are not exhaustive and any supplies by a holding company to a subsidiary can constitute a taxable economic activity where such supplies are made on a continuing basis and are subject to VAT.

In terms of the right to recover VAT on costs, the CJEU ruled in Larentia + Minerva (C-108/14) that share acquisition costs can be a part of the general costs of a company and if so a company has the right to deduct VAT incurred based on the extent to which the company is engaged in taxable economic activities. More on Larentia + Minerva judgement later!
As such, in the case of active holding companies providing only VATable management services to subsidiaries, the VAT incurred on share acquisition costs is deductible in full. If active holding companies provide a mixture of taxable and exempt services, it would be necessary to apportion the VAT incurred to determine the percentage recoverable.

Revenue in their guidance confirm that the right to deduct arises at the time costs are incurred but in order for holdings companies to support this right its important they hold objective evidence that they intend to provide taxable management services on or before these costs are incurred. The question remains for holding companies as to what “objective evidence” would be adequate?

The question of intention was key in the recent Ryanair case (C-249/17) in relation to the airlines failed attempt to acquire Aer Lingus. Ryanair sought to deduct VAT on costs incurred in relation to the proposed acquisition which was blocked by Irish Revenue on the basis that Ryanair did not acquire the shares and as such it did not provide the intended taxable management services which granted it a right to deduct VAT. Upon referral from Ireland, the CJEU held that as Ryanair intended to pursue a taxable economic activity once the shares were acquired, that being to provide taxable management services to Aer Lingus, it was entitled to the deduct the VAT at the time it costs were incurred even though the planned activity was never in fact carried out.

Revenue importantly also clarify in their guidance that the level of management fees charged does not impact the deductibility of VAT incurred on share acquisition costs and as such, the VAT incurred is deductible even if the amount of management fees is less than the input costs incurred in acquiring the shares.

3. Mixed Holding Companies

A mixed holding company is engaged in both economic activities (active shareholding) and non-economic activities (passive shareholding). To put it simply mixed holding companies provide management and other services to certain subsidiaries and not to others.

The deductibility of VAT incurred on share acquisition costs therefore depends firstly on whether such expenditure is linked to the company’s economic or non-economic activity and if linked to the economic activity, the extent to which this economic activity is taxable. Where acquisition costs are related to both taxable and exempt economic activities the input VAT must be apportioned.

In Larentia + Minerva, the CJEU echoed the rule established in Cibo (that the involvement of a holding company in the management of a subsidiary is an economic activity for VAT) but added to the judgement as it confirmed that expenditure incurred by mixed holding companies which involve itself in the management of only some subsidiaries, must establish the extent to which such costs relate to that economic activity. Once the proportion of costs which relate to the economic activity is determined it must be then considered the extent to which these are used for taxable (e.g. administration, legal, IT etc.) as opposed to exempt (e.g. granting of loans) transactions.

Ongoing Costs for Holding Companies

The extent to which VAT on ongoing costs (group audit, legal, regulatory fees etc.) is deductible by a holding company depends on whether such costs are used for the purpose of a taxable or qualifying activity. However, even if costs are not directly linked to such activities VAT recovery can still be available.

Larentia + Minerva established the right for holding companies to deduct VAT on ongoing costs even if there is no direct and immediate link with taxable output transaction. Where it can be demonstrated that such costs are part of the general costs as a whole the VAT is deductible based on the company’s overall VAT recovery entitlement.

The key issue for holding companies and especially those with mixed activities is determining the link between the costs incurred and its activities for VAT purposes. As reiterated by Revenue this link must be based on an objective evaluation of the use of such costs and additionally companies must ensure that there is in fact a causal link between the inputs and the activities which grant a right to deduct. To illustrate this point, Revenue’s guidance provides that expenditure incurred in relation to certain restructuring activities, issuing shares or defending a takeover bid would not have the necessary link to the economic activity of a company as these costs are in fact incurred for the benefit of shareholders.

Share Issue Costs

As the issue of shares is not considered a supply for VAT purposes, a company must first consider whether the shares were issued to raise capital for the purposes of its economic or its non-economic activity. Once this split is determined any expenditure incurred which relates to the economic activity and therefore which forms part of general costs is deductible but only to the extent that it is linked to VATable economic activities.

Sale of Shares

The sale of shares, from a VAT perspective, is either a non-economic activity or an exempt economic activity and VAT on costs directly linked to the sale of shares would generally not be deductible.

However in the 2008 SKF (C-29/08) judgement, the CJEU confirmed that where it can be demonstrated that there is a direct and immediate link between the costs incurred in selling shares and the taxable economic activities of the company as a whole there is an entitlement to deduct some or all of the VAT paid.

While the exercise is by no means straight forward, when determining the right to VAT recovery on share sales costs, companies must consider whether the costs are incorporated in the sale price of the shares or whether they are among the costs components of the general transactions. Additionally and as provided by case law, the reason/motivation for a share sale can be a factor which impacts the right to recover VAT.

Revenue have also confirmed that it is their view that certain expenditure incurred, such as advice on the appropriateness/consequences of selling shares, on valuing and marketing shares or on transferring ownership of shares will always be directly linked to the sale of shares and therefore the VAT incurred is generally not deductible. By exception, the sale of shares to a non-EU party is regarded as a qualifying activity for VAT purposes which grants right to deduct VAT incurred on costs.

VAT Groups

The manual concludes by providing guidance for VAT groups. It is well established that the VAT recovery entitlement for a VAT Group is subject to the same conditions as other taxable persons.

As such, VAT groups must determine the extent to which expenditure incurred has a direct and immediate link with taxable transactions or a link to the general costs of the economic activities of the VAT group as a whole.

The guidance also confirms Revenue’s view on the impact of a passive holding joining a VAT group. In this scenario, they consider that only the non-economic activity of the passive shareholding in other VAT group members can be disregarded from the non-economic activities of the VAT group as a whole. Therefore, the passive shareholding in non-VAT group companies must be taken account of when measuring the non-economic activity of the VAT group.


As you will have no doubt gathered from this article, the VAT deductibility rules for holding companies are extremely complex and there is no one-size-fits-all approach.

The conclusions are further complicated when holding companies have mixed activities, are part of a VAT group or wish to determine whether the formation of a VAT group may have a positive impact on VAT recovery. However, VAT recovery is available on transaction costs if the right action is taken at the right time. Conversely, failure to take the right steps often results in recovery being lost.

As always, our experts are always available to assist, please contact Vincent McCullagh, Kate O'Toole or another member of the team should you wish to discuss your company’s VAT recovery entitlements.

Did you find this useful?

Thanks for your feedback

If you would like to help improve further, please complete a 3-minute survey