The first decision, issued by the French Administrative Supreme Court on 24 June 2013 (Air Liquide, no. 350588) relates to the recovery of VAT on acquisition costs.
In principle, acquisition costs borne by a mixed holding company form part of its general costs, the corresponding input VAT being partially deductible (proportionate to the company’s general VAT recovery ratio).
In the Air Liquide case, the legal issue was that the acquisition costs were borne by the head holding company of the group whereas the shares were actually acquired by one of its subsidiaries. The tax authorities considered that the input VAT was fully non-deductible at the head holding company’s level because the acquisition costs had not been incurred for the purposes of its own activities, but in the interest of its subsidiary (reasoning validated by the French Administrative Supreme Court in its AxA decision of 2008).
The French Administrative Supreme Court, dismissing the tax authorities’ argumentation, recognized here the right to partially deduct the input VAT on the said acquisition costs, since the company was able to provide supporting documentation showing that the acquisition was part of a strategy to increase the revenues deriving from the provision of management services to its new subsidiaries (including a sub-subsidiary). It was further noted that considering the group’s organization, only the head holding company would render management services to the newly acquired sub-subsidiary.
This new case law should be borne in mind by groups intending to purchase French entities in advance of structuring the acquisition and routing acquisition costs.
The second decision, rendered by the Administrative Court of Appeal of Paris on 4 July 2013 (Ginger, no. 12PA02858), concerns the impact of the receipt of dividends on the VAT recovery rights of a mixed holding company. It held that, the receipt of dividends constituting an activity outside the scope of VAT not granting VAT recovery rights, the company should have neutralized the recovery of a portion of its input VAT based on an allocation key (now referred to as a VAT liability ratio – in French: ‘coefficient d’assujettissement’) properly documented.
This risk that practitioners had pointed out (based on CJEU case c-437/06 Securenta of 13 March 2008 and on the reform of French VAT recovery rights in 2008 which required taxpayers to determine, for each expense bearing VAT, a VAT liability ratio reflecting the proportion of its use for activities within the scope of VAT) has now clearly started to materialize, urging partially VAT liable entities to closely review their situation and take necessary steps to secure their position.
Beyond the technical arguments, these cases are also good examples of the ever increasing importance of prior documentation in VAT audits and litigation, especially in the field of VAT recovery.