Indirect Tax Update for week ending 17 July 2015

1. © 2015 Grant Thornton UK LLP. All rights reserved.
ITU
Summary
The CJEU has issued two
judgments this week. The first
concerns the long-running and
thorny issue of whether input
VAT incurred on the costs of
acquiring a subsidiary company
can be recovered by a holding
company.
The second relates to whether
the sale of mechanical
breakdown warranties was a
contract of insurance and
whether, as a result, it was subject
to French Insurance Premium
Tax.
Finally, there has been much
comment recently on the issue
of whether royalties should be
included in the value of goods
for the purposes of calculating
Customs Duty on importation.
We consider the implications for
importers of the proposed new
Union Customs Code
implementing regulations.
21 July 2015
Court of Justice of the European Union (CJEU)
The CJEU has issued an important judgment in relation to the long-running question
of whether a Holding company is entitled to reclaim input VAT incurred on costs
relating to the acquisition of shares in a subsidiary company. The Court has confirmed
that, in principle, where a holding company is actively involved in the provision of
management services to a subsidiary, the costs associated with its acquisition are
general overheads. As such, there is a direct and immediate link with the taxable
economic activities of the holding company and the VAT incurred is eligible to be
reclaimed in full.
The German tax authority had taken the view that, in the case in question (Larentia &
Minerva – Case C-108/14), the holding company could only reclaim a small proportion
of the VAT. This was because, in its view, the company had both economic activities
(supplies of management services) and non-economic activities (the holding of shares).
Accordingly, only that proportion relating to the economic activities could be
reclaimed.
The Court has ruled that in a situation such as this, a holding company is entitled to
recover in full any VAT incurred on the acquisition of the subsidiary's shares if the
holding company provides that subsidiary with management services for consideration.
The VAT incurred on the cost of acquiring the shares has a direct and immediate link
only with the economic activities of the holding company (and not with the non-
economic activity of its holding of the shares). As such, provided the economic
activities are taxable, the VAT Directive provides for full input VAT recovery.
In a second strand to the case, the Court has also ruled that the Directive does not
preclude non-legal persons (eg a partnership) from becoming a member of a VAT
group. Persons that are closely tied by organisational, financial or other links are
entitled to be treated as a single taxable person. However, Member States are entitled
to lay down rules in order to prevent avoidance or abuse and, as such, they have a
degree of discretion. As the Directive provides for such discretion, the provisions of
the VAT Directive relating to the inclusion of group members does not have direct
effect.
Comment – It seems clear that, following this judgment, HMRC will have to re-
examine its recent policy statement on the recovery of input tax by holding companies.
HMRC's current views are clearly at odds with those of the CJEU and we await an
update to R&C Brief 32/2014
Issue22/2015
Holding companies & Input VAT
Indirect Tax Update

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Court of Justice
Sale of mechanical breakdown warranties
The Court has issued a judgment in relation to the supply of mechanical breakdown warranties sold
with second hand cars. In the case of Mapfre Warranty SpA & Mapfre Asistencia (Case C-584/13),
Mapfre warranty SpA (Mapfre) argued that what it was supplying was an 'after-sales' service to motor
dealers who sold second hand cars to customers and that such sales were taxable sales for VAT
purposes.
However, the evidence before the court suggested otherwise. For VAT purposes, the essentials of an
insurance transaction are, as generally understood, that the insurer undertakes, in return for prior
payment of a premium, to provide the insured party, in the event of materialisation of the risk
covered, with the service agreed when the contract was concluded.
In this case, the customer had a direct relationship with Mapfre and paid a premium to Mapfre in
return for mechanical breakdown cover. In the event of a breakdown, the customer's costs were
covered by Mapfre. The court therefore found that, on the evidence, what was being supplied to the
customer by Mapfre was a contract of insurance. Such insurance was exempt from VAT but was
subject to French Insurance Premium Tax (IPT) at 18%. Similarly, when Mapfre covered its risk with
Mapfre Asistencia, that was also a contract of insurance which was subject to French IPT.
Comment
It seems that, in this
case, the evidence
before the court did
not corroborate the
taxpayer's claim that
what was being
supplied was 'after-
sales' services.
The Court found that
there was a contract of
insurance between
Mapfre and its
customer and, as a
result, whilst there was
no VAT due on the
supply, IPT was due at
18%
Union Customs Code (UCC)
Comment
The new Union
Customs Code comes
into force in the UK in
2016.
Importers need to
value imported goods
when they arrive in the
EU and need to
understand when
royalty payments
should (or should not)
be included in the
dutiable amount for
Customs purposes.
Royalty payments under the UCC
We are aware that, in recent weeks, there has been much speculation regarding the duty treatment of
royalty payments under the UCC rules, which enter into force on 1 May 2016. Some commentators
have intimated that all royalties will become dutiable under the UCC which, if true, would have a
significant detrimental impact on importers who pay royalties. However, after careful examination of
the latest draft legislation, we do not consider this to be the case.
The UCC has a piece of supplementary legislation called the Implementing Act, currently in its fifth
and supposedly final draft. In this draft legislation, the removal of specific clauses has caused
uncertainty. However, as the Implementing Act is supplementary to the UCC, it cannot override the
key clauses. The UCC states that royalties and licence fees are only dutiable if they are a condition of
sale of the goods that are being imported. In addition, royalties and licence fees are only dutiable if
they are related to the goods that are being imported.
If these two conditions are not met, the royalty cannot be dutiable. In essence, we consider that this
means that nothing will change for importers of goods who have to pay royalties currently – if
royalties are not dutiable now, they will not be dutiable under the UCC but if there is any doubt as to
whether or not current royalty payments are dutiable, importers should review their existing contracts
as a matter of priority.
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 7728 2556
Andrea Sofield London & South East andrea.sofield@uk.gt.com (0)20 7728 3311