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VAT & EU

In the EU, the CJEU has issued a decision that clarifies how and when a fixed establishment arises for VAT purposes where the taxpayer has a subsidiary in another member state, and AG Pitruzzella has opined that a holding company may not recover input VAT incurred on a taxable supply of services contributed free of charge to its subsidiaries and used for their VAT-exempt activities. France has introduced an amnesty for certain foreign businesses that failed to register for VAT, the Netherlands will no longer allow foreign establishments to be part of a VAT group and Poland’s new VAT grouping rules are further postponed until 1 January 2023. An article on UK customs duty rules for goods moving between the UK and EU highlights the need for robust controls and oversight. 

Advocate-General (AG) Pitruzzella of the Court of Justice of the European Union (CJEU) issued his opinion on 3 March 2022 determining that a holding company may not recover input VAT incurred on a taxable supply of services contributed free of charge to its subsidiaries and used for VAT-exempt activities of the subsidiaries (Finanzamt R v W-GmbH). The CJEU still must issue its decision in the case.

 

Comments

The ability of holding companies to recover input VAT has been a recurring issue before courts in the EU member states and the CJEU.

Should the CJEU follow the AG’s opinion, tax authorities throughout the EU likely will be alert to situations in which holding companies incur costs that arguably belong to a subsidiary. Potentially affected taxpayers should consider the following actions to reduce the chance of future challenges:

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  • VAT enterpreneur
    Ensure that the holding company is a VAT entrepreneur. This will be the case if the holding company permanently provides services to each of its subsidiaries for a fee (the type of services is irrelevant). If this is not the case, the holding company will only qualify as a partial VAT entrepreneur and, therefore, it will only be able to take a partial deduction (i.e., VAT paid on purchases of non-VATable or exempt items will not be deductible).
  • Sufficient documentary evidence existance
    If a holding company deducts VAT on costs incurred, ensure there is a sufficient direct and immediate link between the costs incurred and the holding company’s activity that consists of acquiring, holding and selling shares and providing the above services, and that sufficient documentary evidence exists to demonstrate this fact.
  • Relevant agreements with the subsidiary
    Describe precisely in the articles of association and in any relevant agreements with the subsidiary the activities the holding company carries out (on behalf of the subsidiaries). Continue to monitor whether the holding company's activities correspond to what is included in the articles of association and/or agreements, and amend these documents as needed.
  • Costs are being passed on
    If costs are being passed on, ensure there is an agreement on the basis of which the holding company purchases certain goods or services for the subsidiary.
  • Cost allocation
    If the relevant costs belong to the subsidiary rather than the holding company, do not deduct the VAT; the invoice should be issued in the name of the party for whom the costs are intended so that party can deduct the VAT on the basis of its right to a deduction (provided the other party can be regarded as the recipient of the supply). 

In this edition: 

  • Canada: Highlights of the new luxury goods tax
  • Chile: IRS announces new VAT withholding obligations for intermediaries 
  • China: Schedule for refund of excess input VAT credit accelerated 
  • European Union:
    • AG opines input VAT incurred on services contributed free of charge to a subsidiary is nondeductible
    • CJEU further clarifies the concept of a VAT fixed establishment  
  • France: Non-resident suppliers of distance sales have opportunity to regularize French VAT liabilities
  • India: 
    • Supreme Court strikes down GST reverse charge on ocean freight in CIF imports 
    • Supreme Court rules reimbursed salary of certain seconded employees is subject to service tax
  • Indonesia: Implementing regulation issued on VAT treatment of e-commerce transactions  
  • International: Indirect tax bytes
  • Netherlands: 
    • No VAT charged on the supply of leased property
    • Foreign establishments to be excluded from Dutch VAT groups
  • Poland: VAT grouping rules again postponed
  • United Arab Emirates: 
    • Highlights of Comprehensive Economic Partnership Agreement with India 
    • New whistle blower program in effect 
  • United Kingdom: 10 common pitfalls with customs declarations 
  • United States: 
    • Breaking down sales and use tax compliance for SaaS companies 
    • CBP and DHS release important guidance on Uyghur Forced Labor Prevention Act 

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