VAT and group restructurings by a holding company

The Irish High Court has held that a holding company which provided management services to some (but not all) of its subsidiaries was carrying on an economic activity and all of the input VAT it incurred in relation to restructurings of the group could be deducted in full as attributable to that economic activity: The Revenue Commissioners v Covidien Ltd [2024] IEHC 192.

In addition, the Court has held that all of the input VAT incurred by Covidien in acquiring management services which it on-supplied to its subsidiaries had a direct and immediate link to those on-supplies despite the fact that the cost of the services was significantly in excess of the charges it made.

The decision is an important one in the context of recovery of input VAT by holding companies and will be welcomed by companies in a similar position which incur costs on management and broader corporate restructurings.

Background

Covidien was the top Irish holding company of the Covidien group of companies, a global healthcare products group and manufacturer of medical devices and supplies. Covidien bought in management services from an affiliate called Tyco Healthcare Group LP (Tyco) and on-supplied those management services to four of its indirect subsidiaries (out of a total of approximately 300).

During the period, Covidien was also involved in two restructuring projects: a restructuring by means of a spin-off of the group's nuclear medicine business and pharmaceutical business to a newly formed company called Mallinckrodt plc (Project Jameson); and the subsequent acquisition of Covidien affected by means of a cancellation scheme of arrangement by Medtronic Plc (the Medtronic transaction).

Covidien claimed input VAT recovery in relation to VAT it incurred on the fees charged to it by Tyco and also the fees it incurred in relation to Project Jameson and the Medtronic transaction. The Irish Revenue Commissioners rejected those claims on the basis that the input VAT did not have a direct and immediate link to Covidien's economic activities and Covidien appealed.

Decision of the Tax Appeals Commission

The Tax Appeals Commission (TAC) (Ireland's first tier tax tribunal) found in favour of Covidien.   The TAC found that Covidien received a single composite supply of services from Tyco and that these services had a direct and immediate link to Covidien's on-supplies of management. The TAC also found that the planning and execution of "Project Jameson" constituted an economic activity and the associated input VAT had a direct and immediate link to Covidien's taxable output supplies as a whole. Equally, input VAT incurred on the Medtronic transaction was deductible as attributable to the economic activity as a whole. Therefore, Covidien was entitled to a full 100% deduction in respect of VAT it incurred on the costs of the services it received in relation to these projects. The Irish Revenue appealed the TAC's decision.

Decision of the High Court

The Irish Revenue argued that the TAC had been wrong to conclude that Covidien was wholly engaged in economic activities. They argued that Covidien also managed all its other subsidiaries  and did so without charge, suggesting it was engaged in partial economic activity as a holding company and therefore was only entitled to partial VAT recovery.

The Irish Revenue also argued that TAC had been wrong to concluded that Covidien received a single composite supply of services from Tyco. They argued that the costs of the services received were far in excess of what was on-charged to Covidien's subsidiaries, suggesting that not all of the services were used for that purpose and therefore Covidien could not be wholly engaged in economic activity.

In relation to the Medtronic transaction and Project Jameson, the Irish Revenue argued that these costs were not used by Covidien in providing management services to its subsidiaries; these transactions were not economic activities. They claimed the TAC made a mistake in law when it concluded that these transactions were part of the active management of Covidien's business as a whole.

Covidien argued that a taxpayer does not have to make a profit on a transaction for it to amount to an economic activity, contending that just because the charge to the subsidiaries was approximately 40% of the cost of purchasing the supplies from Tyco, it did not mean that the remaining 60% of the Tyco services was used for some other purpose. Covidien also argued that the TAC was right to consider the economic realities of these transactions, which were different from the precise wording of the service agreements.

Regarding the Medtronic transaction and Project Jameson, they contended that these transactions were part of the active management of Covidien's business as a whole and were therefore part of their economic activities and therefore the taxpayer was entitled to full deduction for VAT incurred on these transactions.

The High Court held that the TAC had correctly identified Covidien as a taxable person, identified the taxable transactions, and found that the goods and services received were used for the purposes of these taxable transactions. In addition, the TAC had considered all the circumstances surrounding Project Jameson and the Medtronic transaction and applied the relevant EU law correctly.

The Court disagreed with the argument that not all of Tyco's services were used for making on-supplies of management services, such that Covidien could not be wholly engaged in economic activity.  The Court found that the TAC was entitled to conclude that the services were used entirely for the purposes of Covidien's economic activity, despite the fact it on-charged a lower fee. The Court emphasised the importance of considering the economic realities of a transaction, not just the strict wording of agreements. It is the actual conduct of a business and the way it operates which can be crucial in determining VAT liability. The VAT on fees charged by Tyco were directly and immediately linked to Covidien's taxable activities of providing management services to its subsidiaries.

In relation to the Project Jameson, the Court held that the TAC had correctly considered that this amounted to an economic activity as part of the active management of its subsidiaries. Whilst the input VAT incurred was not directly and immediately linked to its supplies of management, they were part of Covidien's general costs and, as such, components of the price of the goods or services which it supplied. Those costs had a direct and immediate link with a Covidien's economic activity as a whole.

 In relation to the Medtronic transaction, the Court agreed with the TAC that the board's initiation, oversight and execution of the disposal of Medtronic was an integral part of the active management by the taxpayer's board of the Covidien Group's business as a whole. On the basis of the Kretztechnic decision, the input VAT incurred in relation to this transaction was, therefore, to be treated as general overheads and attributed to the general taxable economic activities of Covidien as a whole.

Comment

The decision is an important confirmation that restructuring activities carried out by a holding company, which carried on an economic activity in the form of the active management of its subsidiaries, form part of that wider economic activity. As such, any input VAT incurred in relation to those restructuring activities can be recovered as general overheads and attributable to the taxable economic activity as a whole.

The decision also confirms that a company can be considered to be wholly engaged in economic activity even if it does not make a profit on a transaction. The key is whether the company is actively managing its subsidiaries and using the services it receives for its economic activity.

The Court emphasised the TAC's discretion in examining evidence and making findings of fact. Unless the TAC has made an error in law, their conclusions should not be disturbed. As such, the decision highlights the importance of presenting clear and persuasive evidence to support a company's position, particularly in relation to how services are used in its economic activity.

Overall, the decision underscores the complexity of VAT law in its application to holding company scenarios and the need for such companies to carefully consider their VAT position, particularly in relation to complex transactions and arrangements.