• Introduction

It appears to be a misconception that Holding Companies are out of scope of the VAT legislation. However how accurate is this understanding? Inefficient structures may lead to VAT costs, administrative obligations and in some cases can create personal and criminal liabilities.

• Definitions

Pure Holding Companies:  Companies whose sole activity is the holding of shares.

Mixed Holding Companies: Companies which in addition to the holding of shares, perform other activities (such as financing, provision of services, trading in securities etc.).

Taxable person: Based on the VAT EU Directive, is “any person who independently, carries out in any place any economic activity, whatever the purpose or results” of that activity. Based on Cypriot VAT legislation, a taxable person is any person who is, or is required to be, registered under the VAT Law.

Economic Activity:  Any activity of producers, traders or persons supplying services, shall be regarded as economic activity.

• Taxable person

When Companies perform commercial and/ or industrial activities, then the definition of a taxable person is clear and these Companies are required (or can be registered voluntarily), to be registered for VAT purposes.

However, holding Companies’ VAT status is more difficult determine.  Relevant activities of a holding Company are required to be examined very carefully in order to identify whether they qualify as economic activities, and hence fall within the scope of the VAT.

Pure holding Companies functions are: acquiring of shares for long-term investment, receiving dividends, disposing of shares (on a non-frequent basis) and not allowing takeovers of itself or its subsidiaries.  Pure holding Companies cannot be considered as taxable persons for VAT purposes, and similarly acquisition and holding of shares and receiving dividends is not an economic activity.

When Companies which in addition to the holding of shares, perform other activities such as provision of management and administrative services, provision of financing and/ or trading on securities on a commercial basis, they can be considered to be taxable persons for VAT purposes and hence VAT registration obligation may arise.

When a holding Company is involved in the active management of its subsidiary, i.e. the Company supplies services subject to VAT to its subsidiary, such as administration and accounting services, then it is considered to be taxable person for VAT purposes.  In addition, when a holding Company is providing financing services with a commercial perspective, then it is also considered to be a taxable person for VAT purposes.

D. Holding Companies VAT deduction rights

A mixed holding Company may have the right to claim Input VAT deduction.
Input VAT can be defined as the VAT attributed to supplies of goods and provision of services, the VAT from the acquisition of goods from other Member States (MS), the VAT paid at the customs for imports and the VAT self-charged (via the reverse charge mechanism) on the receipt of services from abroad.

The right for the input VAT to be claimed is specified by how the goods and services have been used.  For example the right to claim input VAT is granted if the purchases were used for:

• Taxable transactions;
• Transactions outside the scope which would have been taxable if they were carried out in Cyprus;
• Exempt financial services to non-EU clients (e.g. granting of loans, sale of shares, banking services, insurance services etc.).

No input VAT is allowed if for example relates to:

• Expenses for private purposes;
• Accommodation costs of directors;
• Guests entertainment expenses;
• Saloon cars;
• Expenses that relate or are attributed to exempt supplies etc.

For a mixed holding Company, the concept of direct and immediate link is applicable.  A mixed holding Company is required to establish the direct and immediate link, in order to identify the amount of input VAT that is allowed to be recovered. Please note the below guidelines on the recovery of input VAT:

1. Direct allocation of input VAT to specific transactions;
2. Direct allocation to specific group of activities;
3. Allocation of input VAT which is common between the business and the non-business activities.

Recovery of Common Input VAT for mixed holding Companies

Common input VAT of mixed holding Companies are required to be apportioned between business and non-business activities and then between business activities that have the right to recover the input VAT vs. the business activities that do not have such right. Regulations on how to split the input VAT on common expenses are only available for the relevant input VAT on goods. No regulations exist for input VAT on services.

Savva & Associates aims to work with clients to ensure their Cyprus and international structures are established and administered to the highest level of international standards. Our highly experienced and qualified team will ensure the correct structuring of your Companies and provide comprehensive advice in all VAT and Tax matters.