This article provides an overview of a recent Tax Appeals Commission (TAC) determination concerning holding companies and their entitlement to recover VAT on their costs.

81TACD2022

The case is complicated in its fact pattern but, at its simplest, the case involved a holding company both directly and indirectly holding shares in a number of subsidiaries, some of which were being provided with management services by the holding company in return for consideration.

Also as part of a corporate restructuring, a number of the subsidiary entities were spun out and transferred to a newly established entity. In addition, the holding company was merged with another entity to form a newly established “Company K”.

In order to be in a position to provide the management services to its subsidiaries and to undertake these transactions, the holding company incurred significant costs from a related entity. It claimed full recovery of the VAT on those costs on the basis that they were all directly attributable to its management services. In total, Revenue had issued VAT assessment in excess of €45m recovering a number of years.

Revenue audited the holding company and sought to restrict recovery of VAT on the basis that they did not relate solely to the provision of VATable management services. The holding company appealed this decision, contending that it had an entitlement to full VAT recovery.

The VAT position of share-holding companies including the right to recover VAT on costs has been the subject of a large body of case law from the Court of Justice of the EU including the cases of Abbey National, Cibo Participation, Securenta, Kretztecnik, Volkswagen, AB SKF, Laurentia and Minerva, MVM and Wellcome Trust.

In very broad terms, if a company is engaged solely in a non-economic activity for VAT purposes, such as the holding of shares, it has no entitlement to recover VAT on its costs. On the other hand, if it is engaged in fully VATable activity, it has a right to deduct VAT on its costs. VAT recovery can also be apportioned where a business is carrying on activities that give rise to a right to VAT recovery and those that do not.

In the course of the appeal, which was heard over nine days, the Tax Appeals Commissioner considered a number of issues including whether the company had to self-account for VAT on services received from non-Irish suppliers (if it did not, it would not have incurred any VAT and so recovery of VAT would not have been an issue), the nature of the activity carried on by the holding company and the extent to which it was entitled to recover VAT on its ongoing costs and on the costs related to its restructuring activity.

The Tax Appeals Commissioner found in favour of the taxpayer on all accounts, and in a 172 page determination, stated that:

• As a matter of fact, the holding company was actively engaged and directly and indirectly involved in the management of its direct and indirect subsidiaries in the corporate group.
• The costs incurred by the holding company constituted a single supply of services that was directly attributable and used entirely for the purpose of its economic activity, being the provision of VATable management services to its subsidiaries. Accordingly, the holding company was entitled to full VAT recovery on its costs.
• That the planning and execution of the corporate restructuring was an integral part of the active management of the subsidiaries, that it constituted an economic activity for VAT purposes and that the holding company was entitled to full VAT recovery in respect of the relevant costs.
• That the merger to create “Company K” also constituted the active management of the corporate group, as a whole, to which the company was entitled to full VAT recovery.

The determination has been appealed by Revenue to the High Court.

This case serves as a reminder that recovery of VAT by a holding company, which by its nature is engaged in a non-economic activity that does not give rise to VAT recovery, is certainly possible but is a complex area of VAT law that is also highly dependent on the specific facts of the case and is subject to challenge by Revenue.

The prudent course for businesses is that the entitlement to recover VAT on costs incurred by holding companies, in particular M&A costs which can be significant, is considered in advance of incurring those costs so that the actions necessary from a VAT perspective are taken in a timely manner.

The Deloitte VAT team are well placed to assist as required.