The VAT Status of Holding Companies in Malta
Maltese tax legislation contains various international tax features which make Malta a destination of choice for holding companies. Apart from being the only EU member state with a full tax imputation system, our law allows for attractive tax refunds and offers the possibility of applying the participation exemption on certain income or gains derived from a qualifying participating holding. Another fiscal driver in creating an attractive environment for foreign investors is Malta’s ever-expanding network of double tax treaties. Some holding companies are purely passive in nature and their sole purpose is to acquire and hold shares in other undertakings. Others are very active and provide a wide range of services to their subsidiaries. From a VAT perspective, this distinction has profound implications.
Pure Holding Companies
There seems to be a general agreement that a pure holding company which solely acquires shares in other undertakings, without involving itself in the management of those undertakings, does not have the status of a taxable person. This view is in conformity with settled CJEU case law, which has constantly held that the holding of shares does not constitute the ‘exploitation of property for the purpose of obtaining income therefrom on a continuous basis’.
Nevertheless, the holding of shares is a fundamental way through which a company could be financed and as such it could ultimately be regarded as a supply within the scope of VAT. However, this argument could be dismissed as settled case law excludes dividends from the scope of VAT. Dividends depend on the company’s position at year end and generally the amounts differ depending on the types of shares held. In essence, they constitute a return on investment which is purely the result of the ownership of the property. As a result, no link could be established between the holding of shares and dividends paid.
The VAT Treatment of Bonds
In Harnas & Helm, the CJEU held that investments in bonds should be treated in the same way as investments in shares for VAT purposes. The CJEU concluded that payments received from both shareholding and bondholding are deemed to be the mere result of ownership. However, even though bondholding and shareholding are alternative forms of financing, they have different characteristics. When a holding company holds shares in other undertakings it owns part of their capital, whereas when it is issued with bonds it is granting credit. Therefore, at least from a legal perspective, bonds are actually comparable to the granting of loans.
Moreover, a key distinction is that bonds do not only pay a coupon on a regular basis but also the rate is normally fixed throughout the life of the security. As a result, when a holding company issues bonds to its subsidiaries, this could indeed be considered to be an exempt without credit transaction (in terms of Part Two of the Fifth Schedule to the VAT Act). Accordingly, this transaction would change the status of a holding company from a non-taxable legal person to a taxable person.
Furthermore, the ‘ultimate purpose’ of issuing the bond has an important role in determining whether it constitutes an economic activity or not. If the holding company is issuing bond securities on a continuous basis with the intention of making a profit, this would be regarded as an economic activity within the meaning of Article 5(2) of the VAT Act.
The Concept of ‘Active Management Involvement’
The provision of management services for a consideration by a holding company to its subsidiaries constitutes an economic activity in its own right. This is in line with Cibo and Floridienne where the CJEU held that, if a holding company interferes in the management of subsidiaries and carries out transactions which are subject to VAT (such as the supply by a holding company of administrative, financial and technical services to its subsidiaries), it would be regarded as taxable person in respect of all of its activities.
In order to have evidence that a holding company is supplying management services to its subsidiaries, an invoice has to be issued. In this way, the holding company would be adding substance to the transaction. In Cibo, the CJEU had appeared to rule that a holding company is a taxable person if it supplies management services for a consideration, irrespective of the amount charged.
However, it is important to point out that a holding company could charge a nominal fee to claim a substantial amount of input VAT. Maltese law does not include anti-abuse provisions. Nevertheless, certain provisions from relevant CJEU case law could still be applied.
In some non-EU countries, like Iceland, they have adopted certain standards whereby the tax price of transactions held between related parties has to reflect the general selling price of similar transactions performed with unrelated parties. According to the author, the fee charged should be set at arm’s length with the level of input VAT incurred and if it cannot be fairly established, it should be determined by market forces.
Holding companies may also grant credit to one or more of their subsidiaries. Interest-bearing loans are regarded as exploitation of shareholders’ funds to obtain interest income on a continuous basis. Consequently, as a general rule, they constitute an economic activity as a result of which the holding company would be regarded as a taxable person.
The Recovery of Input VAT by Holding Companies
Given that VAT is a transaction-based tax, input VAT is only recoverable if there is a ‘direct and immediate link’ between the receipts of goods and services and the taxable transactions. This concept was introduced in BLP and it has been reiterated by the Court in several cases.
In Cibo the Court held that a taxable person may acquire the right to deduct even where there is no such link between the input and output transactions. Although the CJEU has not established a ‘direct and immediate link’ between the various services acquired in connection with the acquisition of shares and any output transaction, it considered such supplies to form part of its overheads which are wholly attributable to its business. In line with this judgment, it could be argued that for a holding company to have a right of recovery, the costs incurred must therefore be a component of the price of its products or services.
In the recent joint judgements Larentia + Minerva and Marenave, the CJEU reiterated the principle that when a holding company is active in the management of its’ subsidiaries it should have a full VAT deduction right (except when it also provides exempt supplies). The most interesting element which emerged from these cases is that when a holding company involves itself in the management of only some of its subsidiaries, it can only partially deduct its input VAT.
Floridienne appears to have settled the case law in view of the fact that the receipt of dividends cannot be regarded as an economic activity, irrespective of whether the holding company is involved in the management of subsidiaries. Therefore such dividends must be excluded from the denominator of the fraction used to calculate the deductible proportion of the VAT. Likewise, in Floridienne the CJEU also clarified that since the receipt of interest from subsidiaries did not fall within the scope of VAT on grounds that such activity was carried out on an occasional basis, it must also be excluded from the deductible proportion.
When dealing in shares, the consequences in terms of input VAT deduction are not always consistent and instead they depend on the taxable status of the person holding them. The following table summarises, insofar as this is possible, the grounds on which a holding company is entitled to claim back input VAT.
Input VAT Deduction by Holding Companies
|Type of activity||Deductibility of related input VAT|
|Holding of shares||Deductible as overhead cost if the holding company meets the ‘direct and indirect involvement test’ and supplies taxable transactions (Cibo)
Partial attribution applies if the holding company manages some of its’ subsidiaries (Larentia + Minerva and Marenave)
|Receipt of dividends||They must be excluded from the denominator of the fraction used to calculate the deductible proportion (Sofitam and Floridienne)|
|Interest on loans||They must be excluded from the denominator of the fraction used to calculate the deductible proportion (Floridienne)|
|New issue of shares||
They are deductible if there is a ‘direct and immediate link’ to the overall business activity, thus treated as overhead costs (Kretztechnik)
When the company performs taxable and non-taxable activities, apportionment calculation is required (Securenta)
|Disposal of shares||
No entitlement since costs are related to an exempt transaction (BLP)
Costs can be recovered if there is a ‘direct and immediate link’ or when the sale is regarded as a transfer of going concern (AB SKF)
The Way Forward
Whilst case law has undoubtedly allowed the CJEU to resolve various issues relating to the subject, it is evident that the VAT treatment of holding companies could be a ‘maze’ in certain circumstances. For a country like Malta, where a substantial number of holding companies are established we have no written guidance and rules regarding the right of VAT recovery for holding companies from the local VAT Department. Holding companies must therefore plan carefully as in most cases the recoverability of input VAT depends on how the costs incurred are classified.