New developments regarding right of deduction of input VAT by holding companies

The Swedish Tax Agency has further developed its view of the right of deduction of input VAT by holding companies in conjunction with their acquisition and management of, for example, subsidiaries. The implication of this can be that holding companies providing VAT liable services to their subsidiaries can be seen to undertake operations which do not incur full right of deduction of VAT.

In previous guidelines, the Tax Agency has stated that a holding company providing services to its subsidiaries has the right of deduction of input VAT in conjunction with the acquisition of the subsidiaries and their management. If such a parent company has mixed operations, that is, if they in addition to the VAT liable operations also execute VAT exempt transactions, the right of deduction of input VAT is limited.

In the guidelines now announced by the Tax Agency, the implications of the difference between of so-called active and passive holding companies is further developed. The Tax Agency states, amongst other things, that as a requirement for full right of deduction, the holding company is to execute VAT liable services to all subsidiaries. The decision also stipulates the requirements for measures to be undertaken which can apply to a holding company acquiring a subsidiary and who wants to deduct VAT on the costs for that acquisition. Furthermore, the Tax Agency presents its view of how the right of deduction of input VAT is to be calculated in a holding company having mixed operations and/or is passive in relation to a given subsidiary/ subsidiaries.

The Tax Agency presents its understanding that a holding company, which is a so-called risk capital or fund company, is to incur special treatment amongst active holding companies in terms of the right to deduct VAT in establishing new operations and, also, in the ongoing management of those operations. The Tax Agency believes that such holding companies are to be seen to have VAT exempt operations in the start-up phase and, therefore, incur limited right of deduction of input VAT. According to the Tax Agency, this is in accordance with the holding company’s purpose of selling the subsidiary after the acquisition and development processes.

Comments

It is true that we welcome this decision, as there has been no actual, official interpretation from the Tax Agency as to holding companies’ right to VAT deduction. Their view is now clarified as regards a number of aspects and has its starting point in the EU Court practice. However, we note that the Tax Agency also makes its statements based on current legal practice regarding issues, which are still being tried in the courts. This applies, for example, to the question of the right to deduction of input VAT being impacted by the manner in which newly issued share capital is utilized in the group, and by the manner in which a limitation on deduction of input VAT is to be calculated for holding companies undertaking VAT exempt transactions or who are passive vis á vis certain group companies. This applies also to the question of whether, in VAT terms, it is important that a holding company have an expressed aim to sell, in the future, the subsidiary in question.

The statement by the Tax Agency brings up a large number of questions for the majority of holding companies and it can, therefore, be necessary to review existing structures and agreements.