How do you determine the value of services provided by holding companies (Högkullen CJEU case ?

The Court of Justice of the European Union (“the CJEU” or “the Court”) has published its decision in an interesting case that many VAT practitioners were looking forward to.

The case is C-808/23 Högkullen AB v. Skatteverket where the Court was asked to look at whether support services provided by a holding company to a subsidiary should be valued based on the actual costs incurred.

This decision was important because many were hoping it the Court would provide principles, guidance or other useful information on the interaction between VAT rules and the concept of open market pricing. This has been a long standing issue as the EU VAT Directive does allow tax authorities in some cases to use the open market value as the consideration for a supply. This is usually where the customer is partially VAT exempt and is receiving supplies from another group company.

Background to the case

In Högkullen, a holding company was providing support and management services to its subsidiaries which were operating in the real estate sector and were partially exempt. The services were acquired by the holding company and charged to the subsidiaries on a cost plus basis. The subsidiaries were not able to recover the input VAT in full on these supplies.

However, the holding company did not recharge all costs it incurred to its subsidiaries, only the directly attributable ones. Overhead costs (fundraising costs, costs on a planned issue of shares) were not recharged to the subsidiaries but input VAT on them was recovered in full.

The Swedish Tax Authorities took the view that the value of the services invoiced to the subsidiaries was too low as it did not take into account all costs incurred by the holding company i.e. the overheads were left out. It then argued that the holding company was in fact providing a single service to its subsidiaries, not separate services. As the service was bespoke it did not have an open market equivalent and should therefore have a value that covers at least all costs incurred in order to provide it, including overheads.

The CJEU was asked whether the consideration for the services charged by the holding company should be calculated based on actual costs incurred on the grounds that the service is unique and therefore does not have an open market value.

The Court’s decision

The Court concluded that intra-group services cannot automatically be considered a single supply of services. What the holding company was invoicing was not a single and unique service but a set of separate services according to the CJEU. And for those services it should be possible to determine the open market value. This was despite the fact that a single price was charged for all services invoiced and they were sold as a bundle (a point made by the CJEU in the past repeatedly).

The Court also concluded the VAT Directive does not permit tax authorities to default to the cost-based value without properly examining if a market-based comparison (Art. 72(1)) is feasible.

VAT recovery on overheads

Whether overheads such as those in Högkullen case should be included in the value of intra-group supplies of support services has been a contentious issue over the years.

If the holding company did not have to include overhead costs in the value of its services it would lower the amount of output VAT charged to its subsidiaries and the value of the input VAT blocked from recovery for these entities. But the overheads are recoverable at the level of the holding company in full as the business is fully taxable. This set up allows the group as a whole to save money via input VAT recovery at the level of the holding company. If the subsidiaries would have acquired those services directly from suppliers, at a higher cost, a larger part of their input VAT would have not been recoverable due to being partially exempt.

This is why the Swedish Tax Authorities took the view that the services should be valued at least at the cost of providing them.

Many were therefore hoping we would have clarity as a result of the Högkullen case, but unfortunately the Court concluded it did not have to look at whether all costs should be included or not in the calculation.

This leaves both tax authorities and tax payers unhappy because the “case by case approach” used by the Court does not always produce consistent results and creates a lot of uncertainty.

It is also worth noting that the UK has taken a different approach to the EU. In the JP Morgan Chase Bank NA case the Upper Tribunal decided that intra group supplies of support services (similar to the ones in Högkullen) are in fact a single supply of services.

Holding companies and VAT

Holding companies are often audited by tax authorities (including in the UK) and the VAT treatment on their supplies or the VAT recovery on purchases is questioned.

Feel free to reach out to us if you believe this case may impact your business or more generally if you have any VAT related questions.