VAT tends to be the last item on the agenda when a holding platform is designed and the first to produce an irrecoverable cost. The direct tax analysis is usually settled early: participation exemption, withholding tax position, interest deduction capacity. The VAT position is assumed to follow, and it does not. A Dutch holding company can be perfectly efficient for corporate income tax purposes and still absorb the entire VAT charge on its transaction costs, because for VAT purposes it may be treated as if it were not in business at all. The rules are counterintuitive, they are applied strictly, and the remedies commonly adopted after the fact tend to create a second problem in transfer pricing.
Why a pure holding sits outside the system
The starting position under settled European case law, restated by the Court of Justice in AB SKF (C-29/08), is that the mere acquisition, holding and disposal of shares is not an economic activity. A dividend is not consideration for a supply; it is a return on ownership, or in the words of the Court in Larentia + Minerva (C-108/14 and C-109/14), merely the result of ownership of the property. A company whose only function is to own participations therefore makes no supplies, is not a taxable person within Article 9(1) of the VAT Directive, and has no right of deduction. The Dutch policy decree on taxable status and the VAT group takes the same position for a holding whose only activities are holding shares and the related activities of a shareholder. This is not a restriction on recovery. It is an exclusion from the system entirely.
The practical consequence is blunt. Input VAT on legal fees, financial and tax due diligence, valuation work, notarial costs and integration advice is a real cost to the group, not a timing item. On a mid-market acquisition the VAT on adviser fees is rarely trivial, and it is frequently discovered only when the first return is prepared, by which time the invoices have been issued, the entity has been registered or not registered, and the evidence of intention that would have supported deduction was never created.
The same logic runs through the exit. Disposal costs on a share sale are commonly treated as attributable to a transaction that is either outside the scope or, where the sale falls within the holding’s economic activity, exempt under Article 135(1)(f) of the VAT Directive, so recovery is restricted even where the holding is otherwise a taxable person. The Dutch decree on the deduction of VAT allows no deduction of VAT on costs directly attributable to an exempt share sale unless the buyer is established outside the EU, while costs that are general costs of the business as a whole follow its overall recovery position, which is the test the Court applied in AB SKF. The direct tax outcome and the VAT outcome then diverge sharply: the gain may fall under the participation exemption, which Article 13 of the Wet op de vennootschapsbelasting 1969 applies as a mandatory exclusion rather than an election, while the VAT on the costs of realizing that gain can stick.
What changes when management services are supplied
The position changes where the holding involves itself in the management of its subsidiaries and does so for consideration. Supplying management, administrative, financial, commercial or technical services against a fee is an economic activity; the Court of Justice gives administrative, accounting, financial, commercial, information technology and technical services as examples, and held in Marle Participations (C-320/17) that those examples are not exhaustive. The holding becomes a taxable person, accounts for VAT on those services as the place of supply rules require, and acquires a right of deduction. Costs that cannot be attributed to a particular output transaction, which is the usual position for acquisition costs incurred by an active holding, are treated as general costs of the business and follow the recovery profile of that business as a whole, which is how the Court treated such costs in Larentia + Minerva.
Three qualifications are routinely missed. First, involvement in management is not the same as exercising shareholder rights. Appointing directors, receiving reporting, attending shareholder meetings and approving budgets are ownership functions, not supplies. Second, there must be consideration and a direct link between the fee and identifiable services. In Marle Participations the Court accepted a supply to a subsidiary as involvement in its management on condition that it was made on a continuing basis, for consideration and taxed, with a direct link between the service rendered and the consideration received; a general contribution to costs, or a fee that appears only in a year-end adjustment, invites challenge. Third, the analysis is entity by entity and subsidiary by subsidiary, not a single conclusion drawn for the group.
Mixed activities and the two-stage allocation
Most real holdings are mixed. They manage some subsidiaries for a fee, hold others passively, and often extend intra-group loans that generate exempt financial income. Recovery in that case requires two separate exercises, taken in order, and conflating them is one of the more common technical errors.
The first stage separates the economic sphere from the non-economic sphere. Costs relating to participations that are simply held, with no services supplied, sit outside the scope and generate no deduction at all; a reasonable and documented allocation key is required, and the tax authority will expect to see the method as well as the result. The Court left the method to the Member States in Larentia + Minerva, provided it objectively reflects the part of the expenditure attributable to each sphere, and the Dutch decree on deduction requires allocation keys that give an objective and realistic picture of use, anchored in factors such as turnover ratios, revenues or costs, or floor space. Only the portion falling within the economic sphere proceeds to the second stage, where the pro rata between taxed and exempt outputs applies. In the Netherlands that is the turnover fraction of Article 11 of the Uitvoeringsbeschikking omzetbelasting 1968, which gives way to actual use where it is shown that actual use, taken as a whole, does not match the fraction. A holding that manages some of its subsidiaries for a fee and lends to the others cannot deduct on the basis that it is a taxable person and leave the matter there.
An invoice is not an economic activity. A management fee that exists to justify a deduction, rather than to price a service that is actually rendered, fails twice: once in VAT and again in transfer pricing.
The VAT group and its three links
The Dutch VAT group, the fiscale eenheid btw, is the Netherlands’ use of the option in Article 11 of the VAT Directive. Article 7(4) of the Wet op de omzetbelasting 1968 treats as a single entrepreneur persons that are each an entrepreneur, live or are established in the Netherlands or have a fixed establishment there, and are so bound by financial, organizational and economic links that they form a unit, and it does so by a decision of the inspector, open to objection, taking effect from the first day of the month after the decision is issued. The policy decree nonetheless states that the unity arises by operation of law as soon as the conditions are met, and changes in the same way when a member joins or leaves; the decision, given on request or on the inspector’s own initiative and open to objection, declares whether the regime applies and states the date from which the unity runs, and the members cannot be treated as a unity against their will for any period before that date. The policy decree also fills in the three links. Financial linkage exists in any event where the majority of the shares, including the voting rights attached to them, in each company is held directly or indirectly in the same hands. Organizational linkage exists where the members are under common management, or at least management that functions as a unit, or where the management of one is in a position of factual subordination to the other. Economic linkage exists where their activities mainly pursue the same economic objective, which the decree illustrates with examples such as supplies made mainly for the benefit of another member. All three must be present, and they must be present in fact rather than on paper.
Where the conditions are met, supplies between members fall away for VAT purposes, which removes the need to charge and recover VAT on intra-group management fees and can improve the overall recovery position of the group. The trade-off is joint and several liability for the VAT debts of the group under Article 43 of the Invorderingswet 1990, which the decree ties to a fiscal unity decision of the inspector and which runs until the inspector has been notified in writing that the unity has ceased or that a member has left. That matters when members are later sold, as does a sensitivity to changes in the shareholding or in the management structure that can end the group unexpectedly. A pure holding cannot, as such, be a member, because it is not an entrepreneur. The decree approves the inclusion of a holding that fulfils a steering and policy-setting function in the service of the group’s operating companies, on condition that it asks the inspector in writing, that the three links are present, and that the inspector decides by a formal decision.
The management fee that was invented for VAT
The standard response to an unrecoverable VAT charge is to introduce a management fee. Done properly this is unobjectionable and reflects what the holding actually does. Done as a recovery device it produces a fee with no defined services behind it, no evidence of who performed them, no benefit identifiable at the level of the recipient, and an amount reverse-engineered from the VAT the group wishes to deduct.
Such a fee is vulnerable on both fronts simultaneously. For VAT, the absence of a genuine supply and of a direct link to consideration undermines the deduction that motivated the arrangement in the first place. For direct tax, the fee falls within the arm’s length principle and the documentation duty of Article 8b, which paragraph 3 of that article of the Wet op de vennootschapsbelasting 1969 imposes without any threshold. A fee that cannot be supported by functions, assets and risks is exposed to adjustment at the level of the payer, and a charge for services that were never supplied is exposed at the level of the recipient.
Substance is the common denominator. A holding that supplies management services must be capable of supplying them: people with the relevant competence, decisions taken where the entity is established, and costs that correspond to the functions charged out. The considerations are the same as those governing substance more generally, and the VAT analysis simply makes the absence of substance visible earlier.
A worked example on acquisition costs
Take a Dutch acquisition vehicle formed to buy the shares of an operating target. Adviser fees are incurred before completion: legal, financial and tax due diligence, valuation, and notarial work. Part of the arrangement costs may be exempt financial services carrying no input VAT at all, such as the negotiation of credit that Article 135(1)(b) of the VAT Directive exempts, so they drop out of the question immediately. The recoverable position on the balance depends on a sequence of conditions, each of which can defeat recovery on its own.
The first three settle whether there is any deduction to allocate at all. Status at the time the cost is incurred comes first: the vehicle must be a taxable person when the expenditure is made, or have an objectively evidenced intention to become one, which the Court confirmed in Ryanair (C-249/17) for a company that planned to acquire a target in order to supply it with taxable management services, and an intention formed after the invoices are issued is worth considerably less. The evidence of that intention is therefore not a separate question but the same one seen from the other side, since the status stands or falls on what can be shown. Board minutes, a signed management services agreement, a fee methodology and correspondence predating completion carry weight; an agreement dated back to the acquisition does not. The third condition is the identity on the invoice, a frequent failure and an avoidable one. Article 15(1)(a) of the Wet op de omzetbelasting 1968 allows deduction of VAT invoiced for supplies made to the entrepreneur, and the decree on deduction requires a legal relationship between the supplier and the entity claiming deduction as well as that entity’s name on the invoice and, where the invoice matches that relationship, presumes in the absence of evidence to the contrary that the service was supplied to the person it names. Costs invoiced to the sponsor, to the target or to a group entity other than the one claiming deduction therefore put recovery at risk however carefully the first two have been documented.
The remaining conditions govern how much of the balance survives rather than whether anything does, and they are the two allocations of the earlier analysis reappearing in a concrete file. The scope of the intended activity drives the first: if services will be supplied to the acquired target only, and the same vehicle also holds passive participations, the allocation between spheres applies to the general costs. The exempt output profile drives the second, because intra-group lending by that same entity introduces turnover exempt under Article 135(1)(b) of the VAT Directive, which reduces a turnover pro rata unless the lending is incidental, in which case Article 174(2) of the Directive excludes it from the calculation; in NCC Construction Danmark (C-174/08), on the corresponding provision of the Sixth VAT Directive, the Court of Justice stated that an activity cannot be incidental where it is the direct, permanent and necessary extension of the business or entails a significant use of goods and services subject to VAT. Aborted deals stand slightly apart. Where the transaction does not complete, the deduction is tested against the intention at the time. The Court held in Ryanair that a right of deduction, once it has arisen, is retained even if the intended activity is never carried out, and the decree on deduction keeps it in place where no other use, such as for exempt transactions, has been made of the goods and services acquired and the business was an entrepreneur for the intended taxed transactions, can make that intention plausible, and shows a direct link between the costs and those transactions, and also where, owing to circumstances beyond its control, the business never used those goods and services for taxed transactions. That again returns the analysis to the contemporaneous evidence and so to the condition at the head of the sequence.
None of this requires an aggressive position, and none of it is a route to a lower effective rate. It requires that the VAT consequences are decided before the engagement letters are signed, that the entity supplying services is the entity that can actually supply them, and that the fee is set by reference to what is done rather than to what one wishes to recover.
Montclare structures and operates Dutch and cross-border holding platforms for international groups. Our services are set out on our services page.
This article is informational and does not constitute tax advice. Each engagement is subject to scope and applicable regulation.