VAT Recovery and Grouping: EU Court Rules That Active Holding Companies May Be Entitled to Full VAT Recovery and Partnerships May Join VAT Groups

Sullivan & Cromwell LLP - 5 January 2016

In a welcome development for taxpayers, the Court of Justice of the European Union has ruled that a fully taxable holding company that is actively involved in the management of all its subsidiaries should be able to recover in full any input tax incurred in connection with acquiring, managing, and holding those subsidiaries. Holding companies that actively manage only some of their subsidiaries should be entitled to partial recovery of input tax, based on the proportion of input tax that is attributable to their management activities (or other “economic activity”).

The Court also held that EU member states should not restrict membership of a VAT group to entities with legal personality linked to the controlling body of a group by a “relationship of subordination”, except to prevent abusive practices, tax evasion or avoidance. Taxpayers, however, cannot rely directly on the relevant provisions of EU law, so Member States will have to legislate for entities that do not have legal personality (such as partnerships) to join VAT groups.