New EU case dealing with VAT deduction position of active holdings

The correct VAT treatment of holding companies under the EU VAT system is a controversial and much debated topic. That treatment is often subject to litigation with the tax authorities. The discussions mostly revolve around the entitlement of holding companies to deduct VAT on expenses incurred for the purposes of managing their subsidiaries. The latest EU case deals with the situation of a holding which claimed VAT deduction for costs relating to the activities of its subsidiaries.

Case : W-GmbH (C-98/21)

On 8 September 2022, the Court of Justice of the European Union (CJEU), had another opportunity to deliver a ruling in a new holding VAT case.

The case revolves around the company W-GMBH, which holds participations in X-KG and Y-KGs (KGs). Both KGs were active in the real estate sector and had activities which – to a large extent – did not generate the right to input VAT deduction. In addition to taxable accounting and management support, W-GMBH also made a contribution as shareholder for services (valued at 9,4 mio EUR).
W-GmbH deducted the full VAT paid in connection with these “free of charge” services.

According to the German tax authorities, the input VAT in relation to services contributed as shareholder is not deductible. In order to settle the dispute, the German Supreme Court referred the following questions to the CEUJ.

First question

Is an active holding company having taxable revenue streams with its subsidiaries entitled to deduct input VAT on services which it purchased from third parties and contributed to the subsidiaries in return for a share in the general profit? Even though the services concerned are not directly and immediately connected with the holding’s activities, but rather with the (predominantly) exempt activities of the subsidiaries?

In line with its earlier judgments, the Court also reminded us of the following principles:

  • For a right to deduct input VAT to exist, there should be a direct and immediate link between a particular input transaction and output transactions giving rise to the right to deduct.
  • Where there is no direct and immediate link between a particular input transaction and an output transaction or transactions giving rise to the right to deduct, a taxable person may also be entitled to VAT deduction where the costs of the services in question are part of his general costs and are, as such, components of the price of the goods or services which he supplies. Such costs do have a direct and immediate link with the taxable person’s economic activity as a whole.
  • However, where goods or services acquired by a taxable person are linked to exempt transactions or transactions not falling within the scope of VAT, there can be no subsequent taxation or deduction of input tax.
  • The mere holding of shares in a subsidiary cannot be regarded as an economic activity because any dividend received as a result of the holding of shares is a result of the ownership of property and does not require any active activity from that holding company. This is different iwhere a holding company not only holds shares in a subsidiary, but is also involved in the management and carries out transactions subject to VAT such as administrative, financial, commercial, or technical services.

The Court further clarified that the existence of a link between transactions must be assessed by reference to their objective content; whereby the actual use of the services is decisive for the VAT deduction situation (Sonaecom case; C-42/19).

In the present case, the Court acknowledged that W is a taxable person for VAT purposes (so-called active holing) as it was providing taxable administrative and management services to its subsidiaries against renumeration. Nevertheless, in the Court’s view W is not entitled to deduct input VAT on the (contributed) services. This is because the expenses cannot be considered as relating to the holding’s specific taxable services (accounting and management support) or its general activities (acquisition of shares).

Since the services were deemed to be rather attributable to the (real estate) activities of the subsidiaries, which were to large extent VAT exempt, the input VAT on the contributed services does not qualify for VAT deduction.

Second question

Should the CEUJ rule in favor of VAT deduction, can the set-up be viewed as abuse of law?

Given the answer to the first question, there is no need to answer the second question.


This case is a useful reminder of the importance for holding companies to consider VAT implications when engaged in transactions. The VAT rules in this area are complex and tricky discussions with authorities are never far away. Lately, we also observed an increased focus of VAT authorities on holding companies who tend to increasingly challenge their VAT deduction position.