Is your Luxembourg holding company off the VAT hook?
VAT and holding companies is a story of love and hate. From fully intertwined to complete ignorance from one another, navigating through the rules – an ever changing map – can prove challenging. Although a proper reply will always require an in-depth review of what really is happening, here are already a few quick tips that will help you assess the VAT position of your Luxembourg holding company.
1. The pure passive holding company
If your holding company is a pure passive Luxembourg based holding company – in other words, if it solely and passively owns participations in subsidiaries, and does nothing else – it is safe to assume that the company is off the VAT hook. VAT rules apply to persons (legal or natural) performing economic activities, and it is established case law that merely holding shares does not qualify as an economic activity.
Is this good news ? Yes, and no.
Yes, in case the holding company’s service providers are located outside the EU. In that case, the services that the company receives are generally deemed to be located at the place of the supplier (i.e. outside the EU), where VAT does not apply. In other words, a Luxembourg pure passive holding company will generally (subject to very specific exceptions) not pay Luxembourg VAT on services it receives from non-EU suppliers. This also saves you some VAT compliance costs.
This is however not really good news in case your services providers are located elsewhere in the EU, as VAT will again apply at the place of the supplier, where the VAT rate will generally be higher than that applicable in Luxembourg. A Swedish lawyer invoicing a pure passive Luxembourg holding will apply 25% Swedish VAT on its invoices – much more than the 17% applicable in Luxembourg.
2. The active holding company
Pure passive holding companies nowadays are more the exception than the rule. Oftentimes, holding companies will be involved in some sort of economic activities, ranging from simple financing, or leasing of office space to subsidiaries, to full-fledged management of the group.
As soon as your holding company is performing an economic activity, some VAT rules will have to be kept in mind. It is ultimately a very factual matter, and the scope of the VAT impact will range from virtually no obligation to a full VAT compliance regime involving a VAT registration and filing of periodical VAT returns.
Rule of thumb – exempt services
As a rule of thumb, a Luxembourg holding company that provides financing (or other VAT exempt services) to its subsidiaries will generally not be in a favourable position, as the granting of loans does not open the right to deduct input VAT but often comes with compliance obligations – and therefore costs.
The exception to this general principle is the holding company that grants financing to non-EU subsidiaries. In that case, VAT will not apply but the company would benefit (at least partly) from a right to deduct input VAT. Although this leads to increased compliance costs, such a position may lead to significant amounts of VAT being recoverable.
The holy grail – VATable services
Holding companies can be involved in all sorts of supplies of VATable services to their subsidiaries, the usual suspects being the supply of management services, back-office support or lease of office space with VAT. Such structures have been a “VAT hot topic” over the last few years and throughout the EU, with the Court of Justice of the European Union adopting generally favourable decisions for active holding companies, leading to greater input VAT deduction rights for these companies.
Assuming your holding company provides VAT taxable services to its subsidiaries, then it benefits from a (partial) input VAT deduction right. This may ultimately place your holding company in a favourable position, allowing it to offset substantial amounts of VAT. Amongst the deductible input VAT is that incurred not only on costs linked to the acquisition of shares, but also on broken deal costs, to the extent it is demonstrated that the company intended to supply VATable services to the target.
- A Luxembourg holding that solely holds shares is off the VAT hook. This can be good and bad news, depending on the location of your suppliers;
- If the company provides financing, it can again be in a beneficial or detrimental position. Granting financing to non-EU entities is generally favourable, while doing so with EU based entities only leads to increased costs;
- Luxembourg holding companies providing VATable services to their subsidiaries are generally in a good position, as they are entitled to deduct part of their input VAT, often more than offsetting the VAT compliance costs.
- VAT rules are oftentimes difficult to deal with. But this is ultimately a matter of compliance with the law, and may sometimes lead to advantageous results.
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