C-16/00

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turnover from carrying out economic activ- 3. If the receipt of dividends does remain ities in its own name. outside the scope of value added tax, what are the implications for the right to deduct:

5. By its judgment of 6 January 2000, the tribunal administratif de Lille decided to refer to the Court of Justice for a prelimin- — does no right remain to deduct tax ary ruling the following three questions on expenditure incurred in acquir- concerning the requirements to be met for a ing shares, given that that expen- deduction of input tax under the Sixth diture does not relate to a taxable Directive: transaction,

'1. What are the criteria for establishing — or is deduction allowed under the "involvement"? Can it be inferred from heading of general costs?' the provision of paid services or the running of a group of companies by its holding company, or de facto manage- ment precluding independence on the part of the subsidiary, or some other factor? I I I— Legal framework

'economic activities' comprise all activities used not only for transactions granting the of producers, traders and persons supplying right to deduct but also for transactions services as well as, '[t]he exploitation of that do not give rise to such a right. tangible or intangible property for the Subparagraph 1 of Article 17(5) provides purpose of obtaining income therefrom on that 'as regards goods and services to be a continuing basis'. used by a taxable person both for transac- tions covered by paragraphs 2 and 3, in respect of which value added tax is deduc- tible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions'. Under subparagraph Article 13B provides that specified activ- 2, this proportion is to 'be determined, in ities are to be exempted from VAT. Under accordance with Article 19, for all the Article 13B(d)(5), these include 'transac- transactions carried out by the taxable tions, including negotiation, excluding person'. management and safekeeping, in shares, interests in companies or associations, debentures and other securities, excluding documents establishing title to goods [and] the rights or securities referred to in Article 5(3)'.

Article 19 governs the calculation of the deductible proportion. Under Article 19(1), the proportion is a fraction that has as its numerator the total amount of turnover attributable to transactions in respect of which VAT is deductible. The denominator Article 17 regulates the origin and scope of is the sum of the numerator and the the right to deduct. Under Article 17(2), a turnover attributable to transactions in taxable person is entitled to make a deduc- respect of which VAT is not deductible. tion only in respect of expenditure on VAT is to be deducted from turnover both goods and services used for the purposes times in this calculation. of his taxable transactions, in the amount of the value added tax due or paid in respect of goods and services supplied to him by another taxable person.

Even if de facto management displays in effect all the features of 'involvement', it represents only the final stage of such 'involvement', especially as it can result in the loss of the separate legal personality of Arguments of the parties the subsidiary. In Cibo's view, an investor can find himself in different situations depending on the purpose and extent of his acquisition of shares. 8. Referring to Articles 4 and 13 of the Sixth Directive, Cibo states that these provisions clearly distinguish between activities in the sense of 'economic activ- ities' and other activities, and that this is In this connection, the following two forms decisive for the question of the right to of equity participation entailing 'involve- deduct. ment' correspond to the concept, referred to in the question of the national court, of 'running a group of companies', which is applied as a criterion in French tax law in the field of wealth tax (l'impôt de solidarité sur la fortune): 4 Cibo also refers to a series of judgments in which the Court has ruled on the question of the classification of a holding company.3 It is clear from this case-law that, in principle, a holding company does not carry out any economic activity and is — The first form covers the case in which therefore not a taxable person, unless it the shareholding amounts to practi- involves itself in the management of its cally the whole share capital and the subsidiaries. However, the Court has shareholder actively participates in hitherto not defined the concept of 'invol- running the business, thereby involving vement'. Cibo submits that in this connec- itself in its management. This generally

results in the shareholder providing majority of the voting rights in the under- various services to the subsidiary taking. Such influence can also be inferred undertakings in return for a fee. from various features of the legal, financial, administrative and company relationships between the holding and subsidiary com- panies, such as control of decisions, simi- larity of business objectives, appointment of management personnel and provision of — The second form corresponds to the services in return for a fee. case of the most extensive sharehold- ing, namely where the shareholder is in complete control of the subsidiary undertaking and 'involves' itself in its running as its de facto manager. 10. The Commission refers to the case of Floridiennne, 5which was still pending at the time of its written observations, and to the Opinion in that case of Advocate General Fennelly, who did not define the 'concept of involvement' as such, but In both these cases, the acquisition of examined whether or not the holding shares is an economic activity within the company itself carried out economic activ- scope of the Sixth Directive, because it is ities. possible, in fact or in law, for the holding company to involve itself in the manage- ment of its subsidiary undertakings to a greater extent than usual shareholder rights would permit. According to the Commission, the present question is not to be answered by praying in aid a particular concept of 'involvement' alien to the Sixth Directive — a matter upon which it therefore expresses its view 9. The French Government states first of all in the alternative only — but by assessing that, in its opinion, it is to be inferred a the activities in question in the light of contrario from the Court's settled case-law Article 4 of the Sixth Directive in conjunc- that the acquisition, ownership and transfer tion with Article 2. of shares as well as the receipt of dividends fall within Article 4(2) of the Sixth Direc- tive if those activities are accompanied by direct or indirect involvement in the man- agement of the companies whose shares they are. 'Involvement' means a decisive influence on the management of the under- On the definition of 'involvement', the taking in question. Influence on an under- Commission notes with regard to the taking's management sufficient to amount to 'involvement' may be presumed where 5 — Case C-142/99 Floridiemie and Bert-invest [20001 ECR the holding company in fact or in law has a I-9567.

The Commission concludes that it is very Therefore, the only criterion for determin- difficult to reconcile the concept of 'invol- ing whether a holding company is taxable vement' with the exercise of an economic is whether it carries out activities within activity within the meaning of the Sixth Article 2 or economic activities under Arti- cle 4(2) of the Sixth Directive.

6 — Cited in footnote 3. 7 — Cited in footnote 3; see p. I-3126. 8 — Cited in footnote 5.

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14. It must accordingly be examined, first, As was stated in paragraph 18 of the whether Cibo carries out economic activ- judgment, referring to the judgment in ities which qualify it as a taxable person Polysar, it is otherwise where the holding and which then entitle it, depending on the 'is accompanied by direct or indirect invol- circumstances, to deduct input tax. vement in the management of the compa- nies in which the holding has been acquired, without prejudice to the rights held by the holding company as share- holder'.

15. As the Commission rightly points out, the Court considered this question in 9 — The Court refers in this connection to Polysar, cited in footnote 3, paragraph 17, and Sofitam, cited in footnote 3, Floridienne. paragraph 12.

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The forms of 'involvement' in the manage­ 18. Thus, the answer to the first question ment of subsidiaries that are listed in referred by the national court should, in my paragraph 19 of the judgment in Floridi- view, be that there is 'involvement' of a enne include examples of activities for the holding company in its subsidiary where, in purposes of Article 2 of the Sixth Directive. addition to exercising its shareholder In theory, any economic activity within the rights, the holding company also carries meaning of Article 4(2) of the Sixth Direc­ out for its subsidiary economic activities tive may, in so far as it entails carrying out within the meaning of Article 4(2) of the transactions subject to VAT by virtue of Sixth Directive, entailing the carrying out Article 2 of the Sixth Directive, be 'in­ of activities which are subject to value volvement'. added tax under Article 2 of the Sixth Directive.

21. On the other hand, the French Govern- ment argues in substance that dividends fall within the scope of VAT where there is 'involvement', because they represent the 24. The Court has already held in Sofi- result of the economic activity of acquiring tam 12 that dividends are not consideration and holding shares. However, while divi- for an economic activity, that they therefore dends are in principle subject to VAT, they do not fall within the scope of the Sixth are exempt under Article 13B(d)(5) of the Directive and that dividends resulting from Sixth Directive. shareholdings consequently fall outside the deduction entitlement.

22. The Commission essentially argues that, in the absence of a sufficient direct 25. As regards the submission of the French link between the activities of the holding Government, according to which, if the company and the receipt of dividends, it is acquisition of shares were an economic not possible to regard dividends as the activity within the meaning of Article 4(2) consideration for economic activities. They of the Sixth Directive, it would be necessary are accordingly not payment for services to establish whether there was a direct link which the holding company provides to its between that activity and the receipt of subsidiaries and which are subject to tax dividends, it is sufficient to refer to the under Article 2 of the Sixth Directive. judgment in Floridienne.

26. The Court held in Floridienne 13 that, in view of the fact that, because of certain Assessment features, the amount of dividends depends partly on unknown factors and entitlement

29. Cibo refers first to the case-law of the 27. The answer to be given to the second Court which indicates that the receipt of question is accordingly, in my view, that the dividends neither gives rise to a right to receipt of dividends distributed by a sub- deduct input tax nor leads to the loss of sidiary to a holding company falls outside one. A holding company that 'involves' the scope of the Sixth Directive, because the itself in the management or running of its dividends do not amount to consideration subsidiaries carries out an economic activ- for transactions involving the supply of ity and therefore has the right to deduct goods or services. Nor, therefore, can they tax, in proportion to its taxable and non- be exempt from tax by virtue of Arti- taxable activities. Referring to the judg- cle 13B(d)(5) of the Sixth Directive. ment in BLP Gron/), 15 Cibo argues that deduction is possible except in the case of exempt transactions and that, where goods are acquired in the course of economic activities, the costs of acquisition fall into the category of 'general costs'. These are passed on in the sale price. For undertak- ings that 'involve' themselves in the man- agement or running of their subsidiaries, the acquisition of the subsidiaries repre- VI — The third question sents the first stage of a possible merger of the undertakings in the group in the future and is thus an economic activity. Tax on these costs of acquisition is therefore deductible. 28. The third question referred by the national court concerns the consequences for deduction of input tax if the receipt of dividends falls outside the scope of the Sixth Directive. The national court suggests 30. According to the French Government, two possibilities: first, deduction of the tax the third question need not be answered, on the costs of acquiring the shares is given the answer which in its view must be prohibited; and second, deduction is given to the second question. The costs

arising for an undertaking which 'involves' Assessment itself in the management or running of a subsidiary when it acquires shares in that subsidiary relate to the general activity of 32. As regards the deduction of input tax in the undertaking. It follows from Arti- respect of costs that arise on acquiring cle 17(5) and Article 19(1) of the Sixth shares, it must first be noted that the Directive that dividends in respect of which question referred by the national court only VAT is not deductible may appear only in relates to the case where receipts of divi- the denominator of the fraction. As the dends fall outside the scope of the Sixth dividends are directly, permanently and Directive. Non-taxable transactions within necessarily connected to the economic the meaning of the Sixth Directive are thus activity of the undertaking, there is more- at issue. over no question of incidental transactions within the meaning of Article 19(2) of the Sixth Directive, which could be left out of the calculation. 16 33. According to Article 17(2) of the Sixth Directive, a taxable person is entitled to deduct input tax in so far as 'the goods and services are used for the purposes of his taxable transactions'. 17 Article 17(2) thus sets out the conditions under which input tax may be deducted. The prohibition against deduction is derived from an a 31. The Commission, on the other hand, contrario interpretation. From Arti- proceeds on the basis that no deduction is cle 17(2) it follows a contrario that for possible in the case of the costs of acquiring transactions other than those specified in shares, that is to say costs that do not relate the provision (that is to say for exempt and to a taxable transaction. Since Article 17 of non-taxable transactions), there is no right the Sixth Directive makes no provision in to deduct. respect of transactions arising from an economic activity outside the scope of the Directive, it is for the Member States to determine the method by which the deduc- tion is prohibited. Finally, the Commission 34. This also gives expression to the inten- considers that the concept of 'general costs' tion of the Community legislature to retain is alien to the Sixth Directive. What is in the Sixth Directive the exclusion, pro- instead decisive is whether the costs relate vided for in Article 11(2) of the Second to taxable, exempt or non-taxable activities Council Directive 67/228/EEC of 11 April of the undertaking. However in the case of 1967 on the harmonisation of legislation of Cibo, it is not apparent that the costs of Member States concerning turnover acquiring the stakes in its subsidiaries taxes — Structure and procedures for reappear in the services that it provides to application of the common system of value its subsidiaries. added tax, 18 under which deduction is

39. Thus, the answer to the third question referred by the national court should, in my view, be that the receipt of dividends falls outside the scope of the Sixth Directive and In the case of Midland Bank, which like- that the deduction of input tax in respect of wise concerned expenditure on services in costs for the acquisition of shares is exclu- connection with the acquisition of shares, ded in the absence of a direct and immedi- the Court held that the right to deduct ate link with taxable transactions, unless input tax presupposed that, 'the expendi- the taxable person proves by means of ture incurred in obtaining [the goods or objective evidence that that expenditure forms part of the cost components of a transaction giving rise to a right to deduct. 19 — Bulletin or the European Communities, supplement 11/73, p. 18. 20 — Case 165/86 lutiem [1988] F.CR 1471, paragraph 14. 22 — Midland Bank cited in footnote 2 1 , paragraph 30. 21 — C a s e C-98/98 Midland Bank [2000] KCR I-4177, para- graph 20, and BIJ' Crimp cited in footnote 15, paragraph 23 — Ibid., paragraph 31. 18 et seq. 24 — Ibid., paragraph 32.

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VII —Conclusion

40. On the basis of these considerations, I propose to the Court that the questions referred by the national court should be answered as follows:

(1) There is 'involvement' of a holding company in its subsidiary where, in addition to exercising its shareholder rights, the holding company also carries out for its subsidiary economic activities within the meaning of Article 4(2) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisa- tion of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, entailing the carrying out of activities which are subject to value added tax under Article 2 of the Sixth Directive.