On 9 January 2018 the Tax Department released the Interpretative Circular 222 aiming to explain the tax treatment of companies that are exclusively involved in the holding of shares in other companies. These Companies are known as 'Holding Companies (HC)'.
The circular, clarifies that HC are not considered taxable persons exercising an economic activity as provided for in Article 3 of the VAT Act and relevant ECJ (Court of Justice of the European Union) settled case law. It should be noted that the mere holding of shares in other enterprises does not constitute an exploitation of any type of tangible asset such as immovable property for the purpose of obtaining income on a continuous basis since the potential dividend results solely from the ownership and not exploitation of the tangible asset.
However, the above tax treatment may be differentiated if it is ascertained that a HC is directly or indirectly involved in the management of the companies in which it acquires shares.
In the above sentence, the words "directly" or "indirectly" and “management” have the following meaning.
Direct Involvement: Members of the BoD of the HC are also members of the BoD of the subsidiary.
Indirect involvement: Although there is no direct involvement in the BoD, the HC is in a position to influence the subsidiary’s decisions in another way e.g. directors of a fully controlled related company are also members of the board of directors of the subsidiary.
Management or administration: The management or administration of affiliates has the meaning of managing and coordinating affairs, steering events in a particular direction, organizing and decision making.
Whether a HC can provide the above services, is a matter of the surrounding facts. For example, the HC may either have its own human and technical resources or assign the performance of management services to third parties who have these resources. Irrespective of whether a HC has available own resources or assigns the management and administration function to third parties, the existence of an economic activity is only evidenced if there is a separate consideration for these services.
Therefore, if the HC acquires services from third parties, such as legal, administrative and promotional services, it is not entitled to deduct input tax unless it uses them in the context of supplying taxable goods or services i.e. it charges them to the subsidiary to which it provides management and administration services. It should be noted that charges to the subsidiary must reflect the economic and commercial reality in order to justify the amount of expenses incurred and, consequently, the input tax claimed i.e. avoid artificial
arrangements with the sole aim to obtain tax benefit; for example, to charge €1.000 per year, account for €190 output VAT and claim €50.000 input VAT on expenses.
If the HC acquires services that are or will be used by its subsidiaries, input tax is not deductible unless subsequently recharged to the subsidiaries. That is, if the HC acquires services for the benefit of its subsidiaries without re-charging them, it is not entitled to deduct input tax.
However, it should be noted that if such services are received by persons established outside the Republic and are related to the direct and exclusive needs of a subsidiary of the HC established in the Republic, the subsidiary may have an obligation to account for VAT under the reverse charge method. The reason for this treatment is focused on dealing with cases where, for the purpose of avoiding VAT payment, the invoices for the acquisition of service are issued to the HC, which is not considered to be a taxable person, instead of being issued to the subsidiary for the sole purpose of not accounting for VAT if the activities of the subsidiary do not allow it to deduct VAT.
Examples with regards to direct or indirect involvement in a subsidiary as well as examples regarding input VAT recovery are featured in the Indrirect Tax Update - Holding companies