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VAT and Holding Companies: (VAT Interpretative Circular – VAT treatment of holding companies)

The Cyprus Tax Department issued on 9 January 2018 an Interpretative Circular (EE222–Holding Companies), clarifying the treatment of input VAT for holding companies based on existing ECJ case law.

Summary of the circular

The Circular distinguishes between cases whereby there is simple purchasing and holding of shares in companies and where there is management or administration of companies in which shares are held. This fundamental distinction is what will determine whether input VAT can be recovered by the holding company.

Purchasing and holding shares in companies and the relevant VAT treatment

The circular states that the mere holding of shares in other undertakings, without being involved in their management either directly or indirectly, for the purpose of receiving dividends does not comprise an economic activity for VAT purposes. Hence, such a holding company is not entitled to register for VAT and reclaim input VAT. The above position of the Cyprus Tax Department relies on the decisions of the CJEU in numerous cases, with the most important one being the CJEU Case C-60/90 Polysar Investments Netherlands.

The treatment of the Input VAT which is incurred by such a holding company is as follows:

VAT on local supplies that were made by Cypriot suppliers

Any VAT suffered on services supplied by local suppliers in Cyprus is not recoverable and therefore it constitutes an actual cost for the holding company which must be expensed.

VAT on intra-community supplies that were made by EU suppliers

Any intra-community services received by the Cypriot holding company from service providers which are established in another EU member state will be regarded as a Business to Consumers (B2C) service as a pure holding company cannot be regarded as a relevant taxable person. Hence, the EU service provider will charge the VAT of the other EU member state on its invoice, and the Cypriot holding company will not have the right to claim back such VAT. Therefore, the Input VAT constitutes again an actual cost for the holding company which must be expensed.

Management of companies and the relevant VAT treatment

The circular states that where the holding company is involved directly or indirectly in the management of the companies it holds shares in, by administrating, coordinating, organising, deciding or overseeing the actions of these companies, then the holding company engages in economic activity.  The dividend income received by the holding company may be regarded as a consideration for the direct or indirect management of the companies it holds shares in.  The areas the holding company may be involved in are financial, commercial, technical etc.  The holding company must prove that it has the available human and technical resources for supplying such management services.

As there are no certain criteria in determining the direct or indirect involvement in the management of subsidiaries, the Circular states that each case will be examined on its own facts.  Examples of evidence towards that effect would be the existence of common directors between the holding company and the companies it holds shares in and board minutes detailing the decision making process.

If such a holding company buys in such services and then resells them, then input VAT can be claimed if the services purchased are used for creating taxable supplies.

However, no input VAT can be claimed where the services purchased are used for the benefit of other companies it holds shares in.

The same VAT treatment applies to purchases related to raising finance for the acquisition of capital to be used for the acquisition of shares in its subsidiaries and the provision of its services. If however the company is exercising both economic and non-economic activities, then input VAT must be apportioned and claimed accordingly.

Specifically, the VAT treatment of the input VAT which is incurred by a holding company involved in the management of its subsidiaries is as follows:

VAT on local supplies that were made by Cypriot suppliers

Any VAT suffered on services supplied by local suppliers in Cyprus is recoverable only on the company’s economic activities, and the taxable portion thereof. On that ground, the holding company shall apportion the locally paid VAT accordingly. Any non – recoverable Input VAT shall be expensed.

VAT on intra-community supplies that were made by EU suppliers

Any intra-community services received by the Cypriot holding company from service providers which are established in another EU member state will be regarded as a Business to Business (B2B) service, and the holding company will be eligible for VAT registration in Cyprus in order to apply the reverse charge mechanism in Cyprus. The relevant reverse charge input VAT is recoverable based on the company’s economic activities, and the taxable portion thereof. On that ground, the holding company shall apportion the input VAT accordingly. Any non – recoverable Input VAT shall be expensed.

VAT on supplies that were made by non-EU suppliers

Any services received by the Cypriot holding company from service providers which are established outside EU will be also regarded as a Business to Business (B2B) services, and the holding company will be eligible for VAT registration in Cyprus in order to apply the reverse charge mechanism in Cyprus. The relevant reverse charge input VAT is recoverable based on the company’s economic activities, and the taxable portion thereof. On that ground, the holding company shall apportion the input VAT accordingly. Any non – recoverable Input VAT shall be expensed.

Summary of key implications

The Circular has emphasized the opportunity, for holding companies involved in the management of the companies they hold shares in, to recover input VAT under certain conditions.  It would be advisable for such companies to obtain a tax ruling confirming the extent of the recoverability of their input VAT.