France: VAT implications of holding company “recharging” of costs

France: VAT implications of holding company

A judgment of the Versailles Administrative Court of Appeals concerns the ability of holding companies to deduct, for value added tax (VAT) purposes, the “recharging” of acquisition costs—specifically in this case, consultancy fees paid on the acquisition of shareholdings held by its subsidiaries.

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A holding company charged trademark license fees to its subsidiaries, as well as charging for its financial activity of granting loans. In the context of restructuring its activities, the holding company paid consultancy fees relating to the acquisition of shareholdings in various companies. After the taxpayer group acquired these companies, the holding company “recharged” these costs, at cost-price, to its subsidiaries that acquired the shareholdings. 

The holding company also included the amounts of these revenues in the numerator of its “VAT recovery ratio”—thus, increasing its right to deduct. On audit, the tax authorities challenged this treatment and considered that a simple recharging of costs cannot ultimately have a positive effect on the holding company’s right to deduct.

Judicial actions

The French Supreme Administrative Court (Conseil d’Etat) disagreed with the tax authorities’ position. The case was referred back to the Versailles Administrative Court of Appeals, and the tax authorities raised a new argument that the costs were not recharged in relation to economic transactions that were conducted in return for payment by a taxable person acting in such capacity, and thus did not result in any value-added. In other words, the tax authorities asserted the recharging of these costs could not increase the turnover corresponding to the transactions giving rise to a “right to deduct” and included in the numerator of the VAT recovery ratio.

The Versailles court concluded that the subject costs incurred by the holding company were incurred in connection with the holding of its interests in the taxpayer group’s subsidiaries, and were not considered to be an economic activities that was within the scope of the application of VAT (even though these costs were charged back to the subsidiaries that had acquired the shareholdings). In summary, the holding company could not assert that the revenues derived from the recharging of the consultancy fees to its subsidiaries corresponded to transactions giving rise to a right to deduct, and thus was not able to include these revenues in both the numerator and denominator of the VAT recovery ratio.


Read a February 2016 report [PDF 83 KB] prepared by Fidal*


* Fidal is a French law firm that is independent from KPMG and its member firms.

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