25.9.2015

Supreme Administrative Court: Deduction of VAT When Acquiring a Subsidiary

On 15 September 2015, the Supreme Administrative Court of Finland issued two decisions concerning the right of a holding company belonging to a group of companies that carries out VAT-liable activities to deduct the value added tax included in the expenses related to the purchase of shares.

The decisions finally provide some clarification of the deductibility of expenses incurred from the purchase of subsidiaries. However, they still leave open the question of how soon after purchasing a subsidiary the parent company must be able to start providing services to it in order to not lose the deduction right.

No Deduction of VAT When Acquiring Company Not Carrying Out VAT-Liable Activities 

Decision KHO:2015:135 concerned the year 2011, when the holding company of a group had acquired the shares of a Swedish company. In 2011, the holding company had no employees and it had not sold any services to any of its subsidiaries. The holding company’s only activities that fell within the scope of VAT consisted of a loan granted to the subsidiary, which yielded VAT-exempted interest income to the holding company.

In this respect, the holding company could not be considered to be a taxable entity referred to in the Value Added Tax Act or the VAT Directive. As the share purchase had taken place at a time when the holding company itself did not engage in any VAT-liable activities, it could not deduct the VAT related to the purchase of the shares. It was considered to be irrelevant that the parent company started to sell VAT-liable services to the subsidiary in question a year later.

VAT Is Deductible When Acquiring Company Carries Out VAT-Deductible Activities 

Decision KHO:2015:134, on the other hand, concerned the year 2012, when the same holding company had acquired the shares of a British company. In 2012, the holding company held the off-the-shelf software licences used by all the companies in its group. Employees in charge of the group’s IT functions had been transferred to the holding company. Their duties included the decision-making, resourcing and coordinating related to the group’s information systems, software and hardware.

The holding company invoiced the parent company for its services, and the parent company, in turn, invoiced the holding company’s subsidiaries for the services together with other group-level charges. As the holding company provided services to its subsidiaries in exchange for payment, it was a taxable entity as referred to in the Value Added Tax Act and the VAT Directive 2006/112/EC.

Expenses related to the purchase of shares were the holding company’s general expenses with a direct link to all of the holding company’s economic activities. As all the economic activities carried out by the holding company were VAT-deductible activities and in no part were activities not entitling to VAT deduction, the holding company had the right to deduct the VAT included in the price of the services related to the purchase of the shares of a new subsidiary in its entirety.

Decisions of the Supreme Administrative Court in Line with CJEU Case-Law 

In its case-law (e.g. joined cases C-108/14 and C-109/14, Beteiligungsgesellschaft Larentia + Minerva mbH & Co. KG and Marenave Schiffahrts and the case-law cited), the Court of Justice of the European Union has specified the criteria according to which an activity is deemed to be such involvement in the management of a subsidiary or an affiliate that leads to the holding company be considered to be engaged economic activities.

The involvement of a holding company in the management of a subsidiary results in tax liability when it entails carrying out transactions which are subject to VAT, such as the supply by a holding company to its subsidiaries of administrative, financial, commercial and technical services.

In this respect, the decisions of the Supreme Administrative Court abide by CJEU case-law, as it was considered that in 2011, the holding company did not yet carry out VAT-liable economic activities, whereas the company’s activities that commenced in 2012 were deemed to be VAT-liable.

Rulings Appear Contradictory and Leave Open Questions  

Decision KHO:2015:135 appears to be contrary to established practice, because when assessing the deductibility for the year 2011, no relevance was given to the fact that the company did begin to carry out VAT-liable activities and started to invoice its services to the subsidiaries in 2012. The Supreme Administrative Court did not provide its reasoning for this view.

Similarly, the decision issued by the Tax Office for Major Corporations, and upheld by the Supreme Administrative Court quite simply states that the purchases related to the acquisition of subsidiary were not connected to the planned future VAT-liable activities in such a way as to entail their deductibility as expenses incurred in preparation for business activities.

It is not evident from the decision why the purchase of a subsidiary in 2011 was not considered to be linked to the holding company’s planned future business activities. The result appears contradictory considering that decision KHO:2015:134 considered that the purchase of a subsidiary in 2012 had a direct link to an economic activity that commenced in 2012.

Decision KHO:2015:135 also leaves open the question of whether the result would have been different if personnel had been transferred or if expenses that would be considered to be expenses incurred in preparation for business activities had otherwise been incurred already in 2011.

Latest references

We advised Neste as it signed a EUR 150 million bilateral green term loan agreement with Danske Bank A/S, Finland Branch. The proceeds of the loan will be used to finance eligible assets and projects in accordance with Neste’s Green Finance Framework. The loan has a tenor of 24 months with one 12-months extension option of 12 months. Neste published a renewed Green Finance Framework in February 2024 to align future financing activities with market best practices and standards. In addition to renewable and circular solutions, Neste’s renewed framework includes renewable energy as an investment category. Longer term actions on ourNeste’s climate roadmap include scaling up new technologies and innovations, with focus on renewable hydrogen. Renewable hydrogen and other new technologies are estimated to have a reduction potential of 20% or more of the 2019 scope 1 &and 2 emission baseline by 2030. 
Case published 4.11.2024
We assisted Nrep in the development of a residential building that will be built adjacent to the Arabia Shopping Centre in north-eastern Helsinki. Our assignment included assisting in a financing arrangement for the residential building, together with corporate and real estate arrangements related to the project. This involved restructuring through share transactions and a demerger, a zoning change, a change of plot division, a joint arrangement, and a management division agreement. The new 16-storey residential building will consist of 188 Juli Living rental apartments and additional business premises on the street level. Once completed, the building will be one of the most energy-efficient residential buildings in Finland. The financing arrangement complies with Nrep’s sustainability targets. LEED Platinum certification will be applied for the project, while the previous two LEED Platinum certificates for residential buildings have been awarded to Nrep’s Herttoniemi and Friisilä sites.
Case published 28.10.2024
We acted as Finnish counsel to Pernod Ricard in the sale of a portfolio of local Nordic brands to Oy Hartwall Ab, an affiliate of the Danish group Royal Unibrew. Pernod Ricard is a worldwide leader in the spirits and wine industry. The local portfolio of brands includes spirits, liqueurs and Finnish wine brands, the best-known being the liqueur Minttu, along with their related production assets based in Turku, Finland. The closing of the transaction remains subject to customary conditions.
Case published 21.10.2024
We advised Neste as it signed a EUR 200 million bilateral green term loan agreement with UniCredit Bank Austria AG. The proceeds of the loan will be used to finance eligible assets and projects in accordance with Neste’s Green Finance Framework. The loan has a tenor of six years. Neste published a renewed Green Finance Framework in February 2024 to align future financing activities with market best practices and standards. In addition to renewable and circular solutions, Neste’s renewed framework includes renewable energy as an investment category. Longer term actions on Neste’s climate roadmap include scaling up new technologies and innovations, with focus on renewable hydrogen. Renewable hydrogen and other new technologies are estimated to have a reduction potential of 20% or more of the 2019 scope 1 and 2 emission baseline by 2030. 
Case published 21.10.2024