In Section 2.3 of the VAT Application Decree (UStAE), the tax authorities have so far denied the qualification as a business activity and thus the input tax deduction if the activity of a company extended to the mere acquisition, holding and sale of participations (pure Financial holding company).
Three exceptions to this basic rule are described in the same place. One of these is the so-called Management holding companywhich can qualify as a VAT entrepreneur by providing various services to the subsidiaries in return for payment.
Nevertheless, a Hamburg tax office denied the input tax deduction of a management holding company in its tax assessment on the grounds that these services were only ancillary to the actual underlying business as conducted by a financial holding company. This meant that there was still no economic activity and the management holding company could not become an entrepreneur for VAT purposes.
This issue has since been decided much more favourably in a ruling by the European Court of Justice (ECJ) on 16 July 2015 (Case C-108/14 Larentia&Minerva, and C-109/14 Marenave).
Accordingly, on 19 January 2016 and 1 June 2016, the Federal Fiscal Court issued two similar follow-up rulings (BFH of 1 June 2016 - XI R 17/11), which may be of some financial significance for proceedings still in dispute and in ongoing practice.
The key point of the two BFH rulings is the now comprehensive qualification of the management holding company as an economically active entrepreneur, not only with regard to the services provided to associated companies, but (new!) also with regard to the holding of the participations.
The BFH no longer categorises the holding of participations as a non-economic activity, meaning that the services cannot be ancillary transactions to a non-economic underlying transaction.
Even if the state VAT advisors do not want to apply these two BFH rulings for the time being - in practice, this case law opens up a very good starting point for open procedures. First of all, however, there is an urgent need for action to immediately scrutinise existing holding structures.
In any case, the starting position of a holding company has improved significantly compared to the aforementioned Section 2.3 UStAE and the chances of a comprehensive input tax deduction have increased considerably.
Rainer Kohler holds a degree in finance from TAXGATE, a tax law firm specialising in transactions, investments and tax compliance.
