European Union – VAT – Input tax – Company invoicing subsidiaries
Portugal Telecom SGPS SA v Fazenda Publica: Court of Justice of the European Union (Sixth Chamber) (Judges Lohmus (President), O'Caoimh and Fernlund (Rapporteur)): 6 September 2012
Sixth Directive (EEC) 77/388 (on the harmonisation of the laws of the member states relating to turnover taxes), article 17 provides so far as it is material: '...2) In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay: (a) [VAT] due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person;...
'5) As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3, in respect of which VAT is deductible, and for transactions in respect of which VAT is not deductible, only such proportion of the VAT shall be deductible as is attributable to the former transactions.’
PT was a Portuguese holding company which provided technical administrative and management services to companies in which it had a shareholding. In the course of its business, it acquired, under the VAT regime, certain services from consultants. It invoiced its subsidiaries for those services at the same price as it had acquired them, plus VAT. In the 2000 financial year, PT deducted all the VAT paid by it from the VAT passed on, taking the view that the taxed transactions, namely the technical administration and management services, were in fact covered by the use of the corresponding services acquired. The tax administration took the view that PT could not deduct all the VAT on the input services, but that it should have used the pro rata method of deduction.
Accordingly, it issued PT a notice of assessment setting the deductible percentage of input tax at approximately 25%. PT challenged that notice of assessment before the Tribunal Administrativo e Fiscal de Lisboa. That court dismissed the action holding that the fundamental aim of such holding companies was to perform exempt transactions (the first instance decision). Since, in addition to those transactions, it was possible to allow, as an ancillary activity, the supply of technical administrative and management services for all or some companies in which it had a shareholding, and which were subject to VAT, that court considered that the supplies of technical administrative and management services were indissociable from the management of shareholdings.
Consequently, that court held that the method to be used in order to determine the amount of VAT to be deducted was the pro rata method. PT appealed to the Tribunal Central Administrativo Sul, (the referring court). In support of its appeal, it submitted that the legal reasoning in the first instance decision infringed both national law on VAT and article 17(2) of the Sixth Directive (EEC) 77/388 (on the harmonisation of the laws of the member states relating to turnover taxes) (the Directive). In so far as the taxable transactions made by PT in connection with its shareholdings were supplies of services which had a direct and immediate link with the services acquired with a view to their supply, PT took the view that it might deduct all the tax paid when the acquisitions were made using the method of deduction based on actual use. In those circumstances the referring court decided to stay the proceedings and refer certain questions to the Court of Justice of the European Union for a preliminary ruling.
By those questions the referring court asked whether articles 17(2) and (5) of the the Directive should be interpreted as meaning that a holding company such as that at issue in the main proceedings, which in addition to its main activity of holding all or part of the shares in subsidiary companies, acquired goods and services which it then invoiced to those subsidiary companies was authorised to deduct the amount of input tax paid by applying the method provided for in article 17(2) of the Directive, or whether it might be required to use one of the methods provided for in article 17(5) thereof.
The Court ruled: the answer to the questions referred was that articles 17(2) and (5) of the Directive should be interpreted as meaning that a holding company, such as that at issue in the main proceedings which, in addition to its main activity of managing shares in companies in which it held all or part of the share capital, acquired goods and services which it subsequently invoiced to those companies, was authorised to deduct the amount of input VAT provided that the input services acquired had a direct and immediate link with the output economic transactions giving rise to a right to deduct.
Where those goods and services were used by the holding company in order to perform both economic transactions giving rise to a right to deduct and economic transactions which did not, the deduction was allowed only in respect of the part of the VAT which was proportional to the amount relating to the former transactions and the national tax authorities were authorised to provide for one of the methods for determining the right to deduct in article 17(5).
Where those goods and services were used both for economic and non-economic activities, article 17(5) of the Directive was not applicable and the methods of deduction and apportionment were to be defined by the member states which, in exercising that power, should take account of the purpose and general scheme of the Directive and, on that basis, lay down a method of calculation which objectively reflected the input expenditure actually attributed to each of those two activities (see  of the judgment). Varzim Sol - Turismo, Jogo e Animacso SA v Fazenda Publica: C-25/11  STC 971 considered.