Holding companies may have an improved VAT position
The new administration of VAT recovery will have a positive economic and administrative impact on the cost structure during and beyond M&A transactions.
The DTA (Danish Tax Authorities) have proposed a new guideline on “holding companies’” VAT recovery position. The holding of shares is generally not considered a taxable activity. As a consequence, “pure” holding companies are not entitled to recover VAT on costs, including acquisition costs.
On the other hand – “active” holding companies undertaking VAT taxable supplies are considered taxable persons granted that the holding company is involved in the management (of its subsidiaries) and on that basis, carries out an economic activity.
However, the DTA has historically applied a strict interpretation of which services should be regarded supplied on the basis of involvement in the management of its subsidiary. As a consequence, holding companies undertaking services not directly linked to the management were disqualified as taxable persons and consequently no right of recovery was granted for VAT charged as general costs (overhead).
Changes will widen the scope of services leading to VAT recovery
The newly proposed guidelines - on the administration of VAT recovery within a holding company - will significantly widen the scope of services leading to a deemed taxable person. Services which were previously not regarded relevant - as there were no direct link to the management - are expected to be accepted in the future. This could be services such as letting of immovable as well as movable property, intercompany sale of goods, the supply of services beyond management.
We strongly suggest that you contact your M&A VAT advisor for further details. Historically, the current draft guidelines entail an extended statute of limitation for VAT periods closed after 1 January 2009 why potential opportunities should be investigated.
Moving forward, we suggest that structuring of costs during M&A transactions takes the proposed administration into consideration, including when the Management Agreements are drafted by the lawyers.