Tax and Duty Manual VAT Deductibility for Holding Companies

Updated on April 12, 2022

Tax and Duty Manual VAT Deductibility for Holding Companies

VAT Deductibility for Holding Companies

Read this text along with Sections 3, 59, and 61 of the VAT Consolidation Act, 2010 (VATCA 201.).

Tax and Duty Manual VAT Deductibility for Holding Companies
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Table of Contents
1 General Principles in respect of deductibility ………………………………………………..3
2 Entitlement to deductibility ………………………………………………………………………..4
3 Deductibility and Apportionment ………………………………………………………………..6
3.1 Economic and non-economic activity…………………………………………………….6
3.2 Deductible and non-deductible economic activity (dual use) ……………………7
4 Holding Companies and Share Acquisition Costs……………………………………………7
4.1 Passive holding companies…………………………………………………………………..7
4.2 Active holding companies…………………………………………………………………….8
4.2.1 Intention and Consideration …………………………………………………………………10
4.3 Mixed holding companies…………………………………………………………………..11
5 Holding Company Ongoing Costs……………………………………………………………….12
5.1 Passive Holding Company…………………………………………………………………..13
5.2 Holding Company Carrying on a Fully Taxable Activity of Remunerated
Management Services ……………………………………………………………………….14
5.3 Holding Company Carrying on a Mixed Activity of Remunerated Taxable
Management Services and Holding of Shares……………………………………….14
6 Deductibility and Share Transactions………………………………………………………….15
6.1 Issue of shares by a company ……………………………………………………………..15
6.2 Sale of shares by a company……………………………………………………………….16
7 Single taxable person (VAT group)……………………………………………………………..18

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Introduction

For transactions with holding corporations, this guidance explains the requirements for deducting the VAT. CJEU rulings on deductibility are included in this document.

1 General Principles in respect of deductibility

Deductions are a fundamental part of the VAT system and exist to relieve taxable persons of the burden of all VAT payable or paid during all economic activity, as stated in numerous CJEU judgements. These deductions, according to the CJEU, cannot be limited.
The common VAT system taxes all economic operations, regardless of their purpose or outcome, unless they are themselves exempt from VAT.
VAT paid by a taxpayer in regard to costs that are directly and immediately related to the transaction or qualifying activity of the taxpayer will be entitled for full deductibility, according to Revenue’s view: I These costs are assumed to be included in the transaction’s overall cost or to be an essential aspect of the activity.
There is no right to deduct VAT paid on expenditures that are directly and immediately linked to an untaxed transaction or activity. Even if the transaction or activity qualifies for VAT reasons, this is still the case.
It is possible to deduct the general costs as long as they are proved to be a cost of the economic activity and thus components of the price of the goods or services that are offered by the person in question. Because of this, these costs are intrinsically related to the economic activities of the taxpayer.
An activity’s VAT deductions can only be claimed if the expense of that activity is directly and immediately linked to that activity’s purpose, as specified in Article 168 of Council Directive 2006/112/EC (section 59(2) of the VAT Consolidation Act 2010 as amended)

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2 Entitlement to deductibility

Vat can be deducted from the price of goods and services purchased if they are “used by him or her for the purposes of his or her taxable supplies or any of the qualifying activities,” as stated in VAT Act 2010 section 59(2). As stated in Council Directive 2006/112/EC, “In so far as goods or services are used for the purpose of the taxed transactions of a taxable person, the taxed person shall be entitled, in a Member State where these transactions are carried out:” and “qualifying activities,” the provisions of Article 168 of this directive are reflected.
An input transaction must have a direct and immediate link to one or more out-of-pocket expenses before the taxable person can deduct input VAT and assess the amount of such deduction. This is a well-established principle based on case law. This means that the right to deduct VAT paid on the purchase of input goods or services requires that their expenditure was part of the cost of the output transactions for which they were eligible to deduct (see Sveda UAB C-126/14, paragraph 27).
Furthermore, the Court has held, even when there is no direct and immediate link between an input transaction and an output transaction, a taxpayer has the right to deduct expenses that are part of the general costs and, as such, are included in the price of the goods or services that the taxpayer provides. According to the Sveda UAB C-126/14 judgement, such expenditures have a direct and immediate link to a taxable person’s whole economic activity. It has been stated repeatedly by the courts that costs must either be “direct and immediate” linked to a person’s taxable economic activities or be part of a person’s general costs linked to their taxable economic activities (e.g. Portugal Telecom C-469/11, AB SKF C-29/08 and Cibo C-16/00)……………………………………………
When it comes to the SKF decision, the Court stated: “It follows that whether there is a claim for deduction is established by what kind of output transactions are ascribed to the input transactions.
When the input transaction subject to VAT has a direct and immediate link to one or more output transactions that qualify for a deduction, then the deduction is allowed. As a result, it is required to determine if the costs incurred by the taxable person to acquire the input products or services are part of the general costs that are linked to the taxable person’s total economic activity. Whether or not there is a direct and immediate link depends on whether the cost of input services is included in the cost of specific output transactions or in the cost of goods or services provided by the taxable person as part of his economic operations.”
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In the Larentia + Minerva (CJEU C-108/14) case, this need that general costs be related to a person’s taxable economic activity is further illustrated. According to the court, Article 17(2) and (5) of the Sixth Directive must be interpreted as meaning that: o the expenditure connected with acquisitions in subsidiaries incurred by a holding company that engages itself in their management and which, on that basis, carries out an economic activity must be considered as belonging to its general expenditure and the economic activity of the holding company” (paragraph 33).
As far as tax deductions are concerned, it’s an undeniable fact that an expense is linked directly and immediately to a specific taxable or qualifying activity, or that an expense is linked directly and immediately to an individual’s overall economic activity. There must be an objective appraisal of all the facts surrounding the incurring of expenditures by the taxpayer and the nature of taxable or qualifying activity that the taxable person engages in. There must be more than just a “causal” link between the cost spent and a person’s overall economic activity, as the CJEU found in the instance of Wolfram Becker (C-104/12).

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Because domestic civil law requires a company like this one to pay for the defence of its representatives in criminal proceedings, it should be noted that this does not affect the interpretation or application of regulations relating to the common VAT system.” To determine whether a transaction is taxable, the only factor that matters is the objective relationship between the services provided by a vendor and the taxable economic activity of the vendor (see Case C-277/09 RBS Deutschland Holdings [2010] ECR I-13805, paragraph 54 for more information on this). (C-104/12) paragraph 32), otherwise the uniform application of EU law in that area would be severely undermined.

3 Deductibility and Apportionment
3.1 Economic and non-economic activity

In order to determine the amount of a person’s expenses that are eligible for tax deductions, it may be required to first determine the cost of those expenses that may be linked directly and immediately to the

close and immediate link between a person’s economic actions and the quantity

non-economic activities of the person Legislation is not required for a

the CJEU, on the other hand, has provided direction in

respect for allocation in certain situations:

As a result of these conditions, and so that taxpayers can make their own decisions, ”

There are certain computations that need to be made by the Member States.

criteria that are relevant to the goal and that are also consistent with it

basic concepts and principles that guide the common VAT system. As a specific example,

It is imperative that Member States use their discretion in a manner that will assure compliance.

It is only for this component of the VAT that the deduction is applied to.

according to the amount of money involved in the transactions

to be able to subtract. As a result, they must make certain that the

quantifying the ratio of economic to non-economic activity

shows how much of the cost of the inputs may be assigned to the project.

Those two sorts of activities (see the 13 March ruling)

European Court of Justice (ECJ) case C-437/06 Securenta (paragraphs 34 and 37)” (MVM)

28/16 par. 47 of C-28.

According to Revenue, the mechanism through which a taxable person allocates costs

the greatest way to balance economic and non-economic activity

is a measure of how much money was spent on such expenses to achieve the individual’s

in a specific context of economic activity

A person’s tax deduction-eligible expenses must be calculated first, and this may need determining the cost of the expenses that can be directly and quickly related to the individual’s

a direct and immediate connection exists between the economic decisions made by an individual and the amount

a person’s non-economic activity There is no need for legislation to create a

In contrast, the CJEU has issued guidance in

due regard for the distribution of resources when appropriate:

For these reasons and in order to provide taxpayers the freedom to decide for themselves,”

The Member States are required to perform certain calculations.

characteristics that are both relevant to and consistent with the objective

concepts and principles that form the foundation of the worldwide VAT system. As a case in point,

In order to ensure conformity, Member States must exercise their discretion in an appropriate manner.

The deduction only applies to this portion of the VAT.

how much money is exchanged in the deals

Subtracting from an equation Consequently, they must ensure that the

measuring the ratio of economic activity to non-economic activity in an economy

illustrates how much of the input costs can be attributed to the project.

Those are the two kinds of activities I’m talking about (see the 13 March ruling)

European Court of Justice (ECJ) case C-437/06 Securenta (paragraphs 34 and 37)” (MVM)

Section 47 of C-28’s 28/16 par.

According to Revenue, a taxable person’s method for allocating costs.

balance between economic and non-economic activities is best achieved through the use of technology

to determine how much money was spent on such expenses in order to fulfil the individual’s goals.

specific to a field of business

3.2 Deductible and non-deductible economic activity (dual use

Section 61 of the VATCA 2010, in connection with rule 17 of the 2010 VAT \sRegulations, establishes a foundation for determining the deductible amount of VAT incurred\sin respect of goods and services obtained for use by a taxable person in the course of

that person’s economic actions, where those expenses are not entirely connected to either

deductible activities or non-deductible activities. The distribution of costs in this

manner is based on Articles 173, 174 and 175 of Council Directive 2006/112/EC.

Article 173 provides:

“In the case of goods or services utilized by a taxable person both for

transactions in respect of which VAT is deducted pursuant to Articles

168, 169 and 170, and for transactions in respect of which VAT is not

deductible, only such proportion of the VAT as is attributable to the

earlier transactions shall be deductible”.

4 Holding Companies and Share Acquisition Costs

There is a special tax treatment for businesses whose main purpose is to own stock in other businesses or to provide taxable management services to other businesses.
In the framework of their shareholding activity, three types of holding companies are taken into account in this section:
passive holding corporations
Involved holding firms
a mixed-level holding competition

4.1 Passive holding companies

The main aim of passive holding corporations is to acquire and retain stock. As a matter of established case law, this activity does not qualify as an economic activity, and so cannot be deducted.

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“A holding company whose sole purpose is to acquire holdings in other companies, without directly or indirectly participating in their management, without prejudice to their rights as shareholders, does not have the status of a taxable person for the purposes of value added tax and therefore has no right to deduct tax under Article 17 of the Sixth Directive,” states the Polysar judgement (C-60/90). For the purposes of value-added tax, the fact that the holding company belongs to a worldwide collection of activities that appear to be under a single name is irrelevant.”
CJEU ruled in Sofitam (C-333/91), “Since the receipt of dividends is not the consideration for any economic activity within the meaning of the Sixth Directive, it does not fall within the scope of VAT. Consequently, dividends from assets are not eligible for deduction.”
“The Court has consistently held that Article 4 of the Sixth Directive must be interpreted as meaning that a holding company whose sole purpose is to acquire holdings in other undertakings and which does not involve itself directly or indirectly in the management of those undertakings, without prejudice to its rights as a shareholder, does not have the status of taxable person and has no right to deduct tax under the Sixth Directive,” according to the Cibo (C-16/00) decision.

4.2 Active holding companies

As a result of their shareholding activities, active holding corporations acquire a stake in other companies for which they provide management services under circumstances where such services represent an economic activity that is subject to VAT.
Floridienne and Berginvest (C-142/99) provides the following clarification: “… involvement of this kind in the management of subsidiaries must be considered as an economic activity… insofar as it involves carrying out transactions which are subject to VAT… such as the supply… of administrative, accounting and information technology services to their subsidiaries.”

VAT Deductibility for Holding Companies 9 in the Tax and Duty Manual
There have been various CJEU cases examining the concept of what constitutes a management service capable of deduction, but the most recent being Marle Participations (C-320/17):
Holding companies’ involvement in the management of companies in which they have acquired a stake is clearly an economic activity under Article 9(1) of the VAT Directive, as it involves the completion of transactions that are subject to VAT as per Article 2 of that directive. For example, a holding company may supply its subsidiaries with administrative services. This is clear from the Court’s settled case law.
As a result, it is important to emphasise that the Court’s case-law does not include all activities that constitute engagement of the holding company in the management of its subsidiaries.
‘Involvement of a holding company in managing its subsidiary’ must be defined as including all transactions comprising an economic activity, within the meaning of VAT Directive, carried out by the holding company for its subsidiary.”
As a result, it is evident that any supply made by a holding company to a subsidiary that is subject to VAT constitutes taxable economic activity.
A holding company engaged in economic activities (the provision of management services that are subject to VAT) has the right to deduct the VAT incurred on those costs that have a direct and immediate link to the provision of those taxable services or those costs that are general costs of the holding company and have a direct and immediate link to the holding company’s taxable economic activity as a whole.
The European Court of Justice ruled in Larentia + Minerva (C108/14) that purchase expenditures are deductible in full in the context of an active holding company. A ruling by the CJEU declared the following:

For a holding company that manages its subsidiaries and engages in economic activity as a result of its involvement, the costs associated with the acquisition of shareholdings in those subsidiaries must be treated as part of the company’s overall expenses, and the VAT paid on those costs must, in principle, be deducted in full, unless certain output economic tr

4.2.1 Intention and Consideration

When expenses are incurred, the entitlement to a tax deduction is granted to the taxpayer. At the time the expenses were made, taxpayers should be able to show that they had the specific intent to provide taxable management services. Taxpayers are not entitled to deduct costs incurred if there is no proof that the taxpayer intends to provide taxable management services.
The CJEU in Rompleman (C-268/83) has stated: “…the principle that VAT should be neutral as regards the tax burden on a business requires that the first investment expenditure incurred for the purposes of and with the view to commencing a business must be regarded as an economic activity…”. This provision does not stop revenue authorities from requiring that a declared intention to begin an economic activity be substantiated by objective evidence, it went on to say.
“It is settled case-law that a person who incurs investment expenditure with the intention, confirmed by objective evidence, of carrying out an economic activity within the meaning of Article 9(1) of the VAT Directive must be regarded as a taxable person,” said the European Court of Justice in SMS Group (C-441/16).
It is clear from the file before the Court that the services at issue were supplied to Ryanair when it was intending to undertake an economic activity consisting of giving to that firm management services subject to VAT by acquiring its shares in the target company. When Ryanair spent money on the services at issue, it appears to have done so as a tax-paying entity. In theory, Ryanair is entitled to deduct VAT paid on the services at issue immediately, even if the economic activity, which was to generate taxable transactions, was not carried out and, as a result, did not generate such transactions. Second, in terms of the circumstances and more precisely the scope of the right to deduct, the costs incurred for the acquisition of Tax and Duty shares For Holding Companies, Manual VAT Deductibility

The corporation in question must be considered a result of the economic activity that involved conducting transactions that gave rise to a tax deduction. As a result, such spending is a direct and immediate portion of the overall costs of that economic activity. Therefore, VAT is entitled to be deducted in its whole.”
There must be a direct link between the consideration and the service provided in order for a service to be included in VAT. A service supply is only considered for consideration by the CJEU if: “…there is a legal relationship between the service provider and recipient pursuant to which there is reciprocal performance, the remuneration received by the service provider constituting the value actually given in return for the service provided to recipient, Tolsma (C-16/93)”.
Holding companies are exempt from VAT when they provide managerial services to a subsidiary and the payment is tied to the profitability or financial strength of that business. In these cases, the CJEU’s finding that a direct link between the supply and the consideration received is not met. In this case, there is no consideration exchanged and the supplies are exempt from VAT.
Finally, Revenue believes that the fundamental rules of deductibility mentioned in this paper are unaffected when a holding company charges a subsidiary lower management fees than input costs incurred in connection with the acquisition of the shares. Input costs are only deductible to the extent that they are used.
For mixed holding companies, see below.

4.3 Mixed holding companie

A holding company can be involved in both passive and active shareholding activities
simultaneously (i.e. non-economic and economic activities). Such holding companies
are referred to as “mixed” holding companies.
In those circumstances it is only those costs which have a direct and immediate link
with the company’s economic activities giving rise to a right to deduct or those
general costs which have a direct and immediate link with that part of the company’s
economic activities as a whole from which a right to deduct arises.
Where acquisition costs are related to both the economic activity of the provision of
taxable management services and the non-economic activity of the passive holding
of shares, the input VAT should be apportioned to ensure that VAT deductibility only
arises in respect of the portion of those costs that are used for the purposes of the
taxable economic activity.

VAT Deductibility for Holding Companies 12 in the Tax and Duty Manual
According to Larentia + Minerva (C108/14), the European Court of Justice also stated that “the expenditure connected with the acquisition of shareholdings in subsidiaries, which is incurred by a holding company that involves itself in the management only of some of those subsidiaries and which by contrast has no economic activity, must be regarded as only partially belonging to its general expenditure, so that the VAT paid on that expenditure may be deducted only i.”

5 Holding Company Ongoing Costs

Ongoing costs (i.e., costs that aren’t related to the acquisition of shareholdings in another company) are eligible for VAT reclaim if they are directly and immediately linked to the taxable output or qualifying activity of the taxable person. In addition, if the costs spent have a direct and immediate link to the person’s taxable economic activity as a whole, the person is entitled to deduct those costs from his or her taxable income. “However, a taxable person also has a right to deduct even where there is no direct and immediate link between a particular input transaction and an output transaction or transactions giving rise to the right to deduct, where the costs of the services in question are part of his general costs and are, as such, components of the price of the goods or services which he supplies.” (C-109/14 par 24). Such costs do have a direct and immediate link with the taxable person’s economic activity as a whole (see, inter alia, judgments in Cibo Participations, C-16/00, EU:C:2001:495, paragraph 33, and Portugal Telecom, C-496/11, EU:C:2012:557, paragraph 37). Because of their status as a holding company, corporations can expect to pay for things like group audit fees, group legal fees, stock exchange listing fees, regulatory fees, and so on. When it comes to the overall activities of the holding company, it is generally accepted that these costs should be considered general costs because they are linked to those activities.

VAT Deduction for Holding Companies in the Tax and Duty Manual
Based on an objective appraisal of the conditions surrounding the acquisition and use of these inputs, a person’s economic activity as a whole can be linked to a claim for deductibility. “Causal connection” isn’t enough in this situation; there must be a “objective relationship” between tax payers’ input costs and the overall economic activity. Second, the referring court states that, since the supplies would not have been performed by the two lawyers at issue if A had not exercised an activity which produced turnover and, consequently, which was taxable, there would be a causal link between the costs relating to those services and A’s economic activity as a whole. Even yet, the Court’s precedent does not permit us to characterise this causal link as one that is immediate and direct in nature. Those services were conducted fully outside of A’s taxable operations, as the referring court itself notes, because there is no legal nexus between A and the criminal proceedings.”
No matter what type of economic activity you are doing for your own profit or that of your shareholders, you may nevertheless incur expenditures related to operations like restructurings for the benefit of your shareholders that do not have a direct business benefit.
Such restructurings may necessitate the issuance of shares.
To resist the takeover attempt.
Depending on the circumstances, these expenses may not be directly related to a company’s taxable economic activities, or they may be viewed as an overall cost associated with such activities.
As a result, a determination of whether or not these expenditures have a necessary direct and immediate connection to taxable supply, or if they can be categorised as general costs, is necessary. For each individual cost, it is important to show the connection between that cost and the taxable production (or overall economic activity).

5.1 Passive Holding Company

On the basis that there is no economic activity, a passive holding company is not entitled to any VAT deductibility for ongoing costs.

5.2 Holding Company Carrying on a Fully Taxable Activity of
Remunerated Management Services

For VAT purposes, if a holding company provides taxable management services to all of its subsidiaries, these costs are deductible as general costs of the holding company. This is on the basis that the holding company only carries on a taxable economic activity and does not have any noneconomic activities.
An active holding company may incur costs that are unrelated to its economic activities in some cases. Under typical deductibility rules, VAT on these charges would fall short of the standard deduction amount.
These transactions include: share issues or sales, where the proceeds of the share issue or sale are not used for the purposes of the holding company’s taxable economic activity (according to the decisions in AB SKF and C&D Foods), and restructurings that seek to create shareholder value, but do not directly relate to the holding company’s taxable economic activity.

5.3 Holding Company Carrying on a Mixed Activity of Remunerated
Taxable Management Services and Holding of Shares

There are three possible VAT deductibility categories in the case where a holding company provides taxable management services to some of its subsidiaries and passively owns shares in the others.
Taxable management services can be separated into two broad categories: direct and indirect charges. These expenses can be written off in full against your VAT.
Another set of expenses is related directly and immediately to the non-economic activity of owning shares in a company in an account. These costs are not eligible for VAT deductibility.
 The third group of costs includes charges that were employed for both the economic activity of providing taxable management services and the non-economic activity of passively owning shares. Deductibility is only allowed for the fraction of the costs that have been used to provide taxable management services in this case, apportionment.

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6 Deductibility and Share Transactions 

Depending on the facts and circumstances of each case, a holding company may be able to deduct the expenditures it incurs in connection with share transfers. However, the standard VAT deductibility principles, as stated above, apply equally to the costs spent in connection with share transactions. ” Several cases have been reviewed by the CJEU from the perspective of the link between costs and a company’s overall economic activity.

6.1 Issue of shares by a company

The money raised from the issuing of shares is not compensation for the issue of those shares (Kretztechnik C-465/03 paragraph 26). As a result, the issuance of shares does not qualify as an output activity for purposes of determining a shareholder’s ability to deduct expenses. Costs for the issue of shares are deductible only if they have a direct and immediate link to the portion of the issuer’s business that is subject to tax.
Costs incurred by a company, through the issue of shares, to raise capital that will be used for the company’s whole economic activities, are deductible to the extent that they relate to the portion of those activities that are subject to VAT (see the Kretztechnik judgement).
Taxpayers can deduct VAT on all of the expenses they incur in connection with the acquisition of various supplies in connection with the issue of shares, provided that they are all transactions that are subject to taxes. This is the case under Article 17(1) and (2) of the Sixth Directive 77/388, as amended by Directive 95/7. “”
However, the costs associated with the share issue can only be partially included as a general cost of the firm’s economic activities when the issuing of shares is meant to raise cash for both the economic and noneconomic activities of the company. A company can deduct just a portion of its expenses if they are directly related to the company’s VAT-exempt business activity. To put it another way, the Securenta ruling (C-437/06) stated that

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In the event that a taxpayer engages in both taxed and non-taxed activities at the same time, he or she may deduct the VAT on expenses related to the issuance of shares and atypical silent partnerships under the Sixth Council Directive 77/388/EEC of May 17, 1977 on the harmonisation of the national laws of the Member States in relation to turnover taxes.

6.2 Sale of shares by a company

It is not possible to deduct the expenditures directly associated with the selling of shares since it is a supply of services that is either not an economic activity or an economic activity that is free from VAT.
An exempt economic supply was sold by the corporation in BLP (Case C-4/94) and expenditures were incurred. Despite the fact that the proceeds from the sale of these shares were used to fund the company’s downstream deductible activities, the Court held that the expenditures associated with their sale could not be deducted since they were directly tied to the exempt supply of those shares.
Case C-29/08, in which expenditures were accrued in connection with the sale of shares exempt from VAT, brought this issue to light once more. Tax deductions for VAT are only allowed in cases where the costs spent are directly linked to the sale of the shares. However, if a direct and immediate link between the costs incurred and the taxable economic activity of the seller can be shown, the seller is entitled to deductibility.
A taxable person may claim a deduction for input VAT paid on services provided for the purpose of selling shares under Article 17(1) and (2) of Directive 2006/112 and Directive 2006/168 if the costs associated with the input services are directly and immediately linked to the overall economic activities of the taxpayer. That’s why it’s so important for the referring court to take into account all relevant facts surrounding transactions at issue in this case and determine whether or not costs incurred will be included in share prices or if they’re only cost components for transactions within the scope of the taxed person’s economic activities.

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X BV (C-651/11): “Since the disposal of shares at issue in the main proceedings must be categorised as an exempt transaction under Article 13B(d)(5) of the Sixth Directive, a right to deduct will exist only if the cost of services supplied to X in relation to that disposal is part of the general costs relating to its overall economic activity, without being incorporated in the sale price of those shares.”
In order to determine if the sale of shares qualifies for a tax deduction, a specific cost must be linked directly and immediately to the sale. Revenue believes that costs associated with acquiring services such as advice on the appropriateness and consequences of selling shares, valuation and marketing of shares, and transferring ownership of shares should be included in the cost of the sale of shares, even though each transaction must be evaluated individually to determine whether such a direct and immediate link exists.
If the shares are sold to a non-EU party, deductibility is only possible in the case of direct and immediate linkage of costs to the exempt sale of shares. Section 59(1)(d) of the VATCA 2010 defines a sale of shares as a “qualified activity” in certain cases.
It is possible to be eligible for a tax deduction even if your expenses aren’t directly related to the sale of your stock. This is the case if your expenses can be linked to one of the following:
Economic activity of the seller can be directly and immediately linked to the sale.
A link between the two costs is a reality that should be established on a case-by-by-case basis.
A recent CJEU decision in C&D Foods (C-502/17) emphasises the importance of considering the motivations behind the selling of shares when trying to determine whether or not it constitutes economic activity. This means that, in order for a share sale transaction to be eligible for VAT, the direct and exclusive purpose for such transaction must be the taxable economic activity of the parent company in issue or that transaction must constitute direct, permanent, and necessary extension of this activity. This is the case when the sale is made with the intention of directing the revenues straight to the taxable economic activity of the parent firm.

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As may be seen from the file before the Court, the sale of the shares at issue in the main proceedings was made with the intention of using the sale proceeds to pay off Kaupthing Bank’s obligation to the Arovit group. A transaction for which the direct and exclusive purpose is C&D Foods’ taxable economic activity, or one that constitutes the direct, permanent, and essential extension of C&D Foods’ taxable economic activity, cannot be considered in this judgement, as mentioned in the preceding paragraph. Sale of shares is not a transaction consisting of earning an ongoing income from activities that extend beyond only selling shares, hence VAT is not applicable to the transaction in question. The result is that no deductions can be made for the VAT paid on the challenged services.

7 Single taxable person (VAT group)

As with any other taxable entity, VAT groups have the same entitlement to deductibility for costs incurred.
The ability of a VAT group to deduct the costs spent by any member of the group, including a holding company, is contingent on the establishment of a link, whether that link is direct and immediate or one that is considered a general cost of the VAT group’s economic activity.. To determine the existence of the link, the consideration between members of the group is irrelevant because the group members are no longer persons in their own right and because transactions between members of the group are deemed not to take place under VAT law, the matter of consideration is irrelevant.
While membership in the same VAT group as a taxable economic activity does not automatically grant the right to deductibility, it is possible for a company to incur costs within the VAT group that are unrelated to the VAT group’s economic activities and, as a result, are not deductible under normal VAT deductibility rules.
To put it another way, the European Court of Justice (CJEU) has confirmed that VAT deductibility rules must continue to apply while examining the VAT group’s overall position. When all VAT group activities are performed by a single legal entity, VAT grouping has the same effect on VAT deductibility as if all of the VAT group activities were performed by one legal organisation.
To be eligible for deductibility, a VAT group needs to establish that the costs it has incurred are directly tied to a VAT-chargeable transaction or activity, or they must be tied to the broad economic activities of the VAT group as a whole. This will be the case for each and every expense.

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Passive holding companies joining a VAT group do not necessarily indicate that all non-economic activity associated with the passive holding of shares is ignored. That is Revenue’s position. It is only the non-economic activity of the passive holding of shares in other VAT group members that is not taken into consideration. The VAT group is considered to have a non-economic activity if it has a passive investment in non-VAT group firms. This non-economic activity should be taken into account by the VAT group for VAT deductibility purposes.
In the context of a VAT group, the ideas established in the preceding sections hold true.

Examples of the Effects of VAT Grouping
Example 1

Holding firm A has a bank subsidiary called Company B that it provides tax-exempt management services to. Currently, there isn’t a VAT working group. For the most part, Company A is entitled to a complete VAT refund on its input costs.
As a result, A and B have formed a VAT group. VAT-exempt banking activities are the VAT group’s outputs. The VAT group’s costs cannot be recouped because the VAT group’s outputs are free from VAT.
Company C, a passive holding company, has one fully taxable subsidiary, Company D. Currently, there is not a VAT group. Due to the nature of its business, Company C is not eligible for any VAT deductions.
In order to save money on taxes, companies C and D join a VAT group. Full taxation of VAT group outputs applies. On the basis that the VAT group’s outputs are completely taxable, VAT recovery is achievable for the VAT group’s costs.
It is possible to deduct VAT on inputs related with raising capital for the benefit of the VAT group if a holding company within a VAT group raises money (such as by issuing shares) and loans this capital to other members of the VAT group. This is based on the premise that the VAT group raised the money and “used” it for the VAT group’s tax-deductible operations.
Using capital raised (including through the issuance of shares) by a VAT group holding company and lending it to other VAT group members in order to be used for VAT group exempt or non-economic activities does not allow VAT deductibility. This is based on the fact that the VAT group has raised and “used” the capital for the VAT group’s exempt or non-economic activities.

VAT Deductibility for Holding Companies 20 Example 5 Tax and Duty Manual
VAT deductibility can be claimed on the basis of an allocation of expenses between taxable and exempt activities when a holding company within a VAT group raises capital (including through the issue of shares) and lends this capital to other VAT group members.