If you are a VAT-registered business, you must deduct VAT on the goods and services you purchase.
VAT deduction
Further details on the conditions for VAT deduction can be found in our factsheet on this subject. The most important of these conditions are:
- you use the services you have purchased in the course of your VAT-registered business;
- for activities subject to VAT (the VAT may be partially deductible, insofar as the services are used for activities subject to VAT);
- and the supplier has issued you with an invoice that complies with all formalities.
Holding company
The right to deduct VAT for a holding company is sometimes ruled out simply because the holding company must be a VAT-registered business. This is because a holding company is not a VAT-registered business if it merely holds shares in one or more operating companies. A holding company is a VAT-registered business if, for example, it actively manages its operating companies in return for a fee (management fee), grants interest-bearing loans or lets out property.
Fiscal unit
Until 2007, Holding X formed a fiscal unit with its operating company H. H’s activities are subject to VAT. On that basis, the fiscal unit deducts the VAT on the services purchased by X and H.
The shares in H are sold in 2007, thereby bringing the tax group to an end. Prior to the sale, the claim that H has against the son of X’s sole shareholder is transferred to X. Following the sale of H, X’s activities consist solely of holding the claim against X’s son.
In 2008, the son’s company went into liquidation. Holding X subsequently incurred costs for lawyers and other advisers between 2009 and 2013. X deducted the VAT on these costs.
No VAT deduction
The Tax and Customs Administration is reclaiming the VAT that was deducted. It takes the view that, whilst Holding X is indeed a business, it carries out only VAT-exempt supplies. Lending money at interest does indeed confer VAT taxable status on X. However, as this activity is exempt from VAT, X is not entitled to claim VAT deduction on the supplies it purchases.
X takes the view that the services purchased still relate to the period during which the fiscal unity, which ceased to exist in 2007, carried out supplies subject to VAT. The Court of Appeal at Den Bosch refers to the rules governing the dissolution of a VAT fiscal unit. Upon the dissolution of the fiscal unit, the private limited companies are deemed to take the place of the fiscal unit in respect of the part that forms part of their business assets. The claim forms part of Holding X’s business assets. Consequently, it is not the VAT-taxable activities of Operating Company H that allow X to base its VAT deduction for the years 2009 to 2013 on H’s VAT-taxable activities within the tax group. The Tax and Customs Administration is therefore correct in recovering the VAT deducted by X.