No input VAT deduction on services supplied as shareholder contributions to subsidiaries

In a decision of 8 September 2022 in the case C-98/21, W GmbH, the CJEU addressed the question as to whether supplies obtained by a parent company in order to forward them to a subsidiary free-of-charge in the form of a shareholder contribution were eligible for input VAT deduction.

Facts

The objects of business of W were the acquisition, management, and use of properties, as well as the design, remediation and realisation of construction projects. W had a significant shareholding in X GmbH & Co KG (“X”) and Y GmbH & CO KG (“Y”). The objects of business of X and Y were the construction of buildings and homes, which were largely exempt from VAT when sold. The minority shareholders of X and Y were Z and Pl.

W provided accounting and management services for consideration to X and Y in relation to construction projects, and also provided services free-of-charge which were forwarded to X and Y as a shareholder contribution. These services were in part purchased from other companies and thus subject to VAT.

The dispute related to input VAT deduction on the services purchased by W from other companies.

Decision of the CJEU

The German Federal Fiscal Court (BFH) justified its referral to the CJEU on the basis of recent CJEU case law, according to which the reason for expenses being incurred can be relevant (CJEU, 8.11.2018, C-502/17, C&D Foods Acquisition) and input VAT deduction on indirect costs was precluded under certain circumstances (CJEU 1.10.2020, C-405/19, Vos Aanemingen). At the same time, the BFH seems to have assumed that there could not ultimately be a right to input VAT deduction in the present case because if the CJEU confirmed input VAT deduction, the question would arise as to the existence of an abusive construction due to the services being charged through W, thereby leading to input VAT deduction that could not have been claimed directly by X and Y (due to VAT exempt supplies by the subsidiaries).

Consequently, the CJEU had to decide whether W could claim input VAT deduction on the supplies paid for by W and forwarded without charge to its subsidiaries if the consideration for the services provided in the form of a shareholder contribution is the share of the overall profits.

The CJEU has denied the right to input VAT deduction on the supplies paid for by W:

• • There is no direct and immediate link with the transactions eligible for input VAT deduction of W. The services purchased by W cannot be used to provide taxable output supplies to subsidiaries. Consequently, these supplies cannot be deemed to be part of the cost elements of the taxed output transactions.
  • Similarly, there is no link between the services purchased by W and W´s general expenditure that would give rise to a right to deduct input VAT, as the supplies in question were rendered by W in its capacity as a shareholder. Thus, the supplies do not constitute costs incurred by W for the acquisition of shares, but rather the actual acquisition of such shares, the shareholder contribution. A contribution of this kind by a company for a subsidiary, whether in cash or as a contribution in kind, constitutes the holding of shares and thus is not an economic activity.
  • There is no direct, immediate link with the economic activity of W for the reason that the services are intended for use by the subsidiaries, thus creating a direct link with the (VAT-exempt) taxable supplies by the subsidiaries.

Having denied the right to input VAT deduction, the CJEU did not comment on the second question presented by the BFH regarding the existence of abuse.

Comment

In the present case, W has no right to input VAT deduction on the services purchased by W and forwarded without charge as a contribution in kind. The CJEU substantiated this decision based on the absence of a link with transactions giving rise to a right to deduct input VAT and the fact that the expenses likewise do not constitute general expenditure of W. Finally, there was a direct connection with VAT-exempt transactions provided by the subsidiary.

The CJEU refers to the distinction between expenses incurred to acquire a shareholding (e.g. consulting costs) and a supply rendered free-of-charge as a shareholder contribution, which belongs to the category of holding shares and therefore does not constitute an economic activity.

In the present case, the CJEU does not address whether the supplies rendered free-of-charge could trigger taxation for own use (in which case W would have a right to input VAT deduction), which would mean the question of input VAT deduction would need to be examined on the level of the subsidiaries receiving the contribution in kind. It seems to have been clear to the CJEU that from the outset the supplies were not acquired for W as a company, and thus no right to input VAT deduction exists.

In conclusion, it should be noted that contributions in kind by the shareholder may be eligible for input VAT deduction at the level of the company receiving the contribution depending on the circumstances of the specific case. In our view, the judgment cannot result in any general ban on input VAT deduction in connection with contributions in kind.

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