• Service: Tax, Global Indirect Tax
  • Type: Business and industry issue
  • Date: 8/1/2012

Input tax deduction for holding companies in Germany 

Input tax deduction

In a recent ruling, the German Federal Tax Court (BFH) addressed the following question: to what extent is a holding company, with several extensive holdings, entitled to deduct input tax, when there is little to no supply of goods and services being made between the holding company and its subsidiaries?

The ruling concerned a joint stock corporation. According to its articles of association, its purpose was the acquisition, management and disposal of holdings, and the performance of services for its subsidiaries. In the year in which the case was brought, the corporation engaged in economic activities (advisory services), the provision of a motor vehicle to an employee, and the concession of a loan relating to no more than two of its 50 subsidiaries. One matter in dispute was the percentage of input tax deduction on overheads.

Another was the tax office’s denial of input tax deduction on the supply of legal advice regarding the disposal of one of the subsidiaries. The BFH indicates that input tax deduction depends on the direct and immediate allocation of an input transaction to a single output transaction, which is to be evaluated as an economic activity. Otherwise, input tax may be deducted if the costs of the transaction are included among general business expenditures, and are incorporated in the price of the services to be supplied by the business. Where the input transaction serves an activity that is both economic and non-economic, input tax deduction is allowed (in line with the European Court of Justice’s (ECJ) ruling in the Securenta case) only if the expenditure is attributed to the economic activity. In this situation, the proportion of input tax deduction would be based on the extent of economic versus non-economic activities. Following these principles, the BFH assumed that the activities of the corporation in question were both economic and non-economic. Because the mere acquisition, holding and disposal of shares does not constitute an economic activity, and only results in economic activity in exceptional circumstances (such as a direct or indirect intervention in the management of the subsidiary company), the BFH assumed in this case that the activity was predominantly non-economic. Even if the granting of a loan could be seen as an economic activity (possibility left open by the ECJ ruling in the EDM case), the BFH found that in this case, the non-economic activity would have to be the corporation’s main activity. An appropriate estimate would allow a deduction of no more than 50 percent of the VAT paid on overheads. With the tax office allowing an excessively high input tax deduction of 75 percent, the BFH disregarded the question of input tax deduction in connection with the costs incurred in the sale of the holding. The ruling is of great importance for holding companies, which are advised to assess what measures they can take to avoid or reduce the risk of their input VAT deductions being limited.


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