Open market value of holding company supplies of management

The CJEU has held that it is not possible to conclude, as a matter of principle, that management services provided by a parent company to a subsidiary are so closely linked that they form, objectively, a single, indivisible economic supply so as to amount to a single supply: Högkullen AB v Skatteverket (Case C-808/23). On the basis of this answer, the Court did not go on to consider perhaps the more interesting aspect of the case, the potential application of the open market valuation provisions to such supplies.

Background

The holding company in this case provided services to its subsidiaries. The were, more specifically, business management services, financial services, real estate management services, investment services and IT and staff administration services. Since the subsidiaries used those services, in part, to make VAT exempt supplies, there was an incentive for the holding company to undervalue its supplies, as the AG in this case noted. The Principal VAT Directive contains provisions (Articles 72 and 80) that allow for open market value to be substituted for the actual consideration for supplies between related parties where the recipient is not fully taxable. Unsurprisingly, the Swedish tax authorities sought to apply these open market provisions. What was in dispute was the amount of the open market value in this case.

Article 72 in particular lays down conditions for calculating open market value. It means "the full amount that, in order to obtain the goods or services in question at that time, a customer at the same marketing stage at which the supply of goods or services takes place, would have to pay, under conditions of fair competition, to a supplier at arm's length within the territory of the Member State in which the supply is subject to tax". However, where there is no comparable supply, then it means, for services, "an amount that is not less than the full cost to the taxable person of providing the service".

The holding company argued that the charge of 2.3m Swedish kronor (SEK) had been calculated by applying the 'cost-plus method'. It had applied an allocation key, whereby a specific percentage of its costs for management, premises, telephone systems, information technology, corporate hospitality and travel was allocated to the output transactions.

In contrast, the Swedish tax authorities considered that as there was no comparable price for the services on the open market, the open market value would be at least equal to the full cost incurred in providing the services. Since the holding company had not provided any other services, the tax authorities regarded the total amount of its expenditure, some SEK 28m, as the taxable amount. (These costs included other shareholder costs and costs associated with audit, general meetings, raising capital, a new issue of shares and stock exchange listing which were not taken into account by the holding company when calculating the consideration for the services on the cost-plus basis.)

The holding company appealed an assessment to VAT on the higher basis, but the court upheld it on the ground that the holding company had fully deducted all of the input VAT amounts incurred. It had thus allocated all expenditure to its economic activity. Since the holding company's economic activity was limited to management of the subsidiaries, all of its expenditure was to be taken into account for the purposes of determining the open market value. The holding company appealed that decision.

Decision of the Court

The decision of the Court focusses on the question whether management services of the type provided by the parent company in this case should always be treated as a single supply and, as such, preclude the open market value of those services from being determined using the comparison method laid down in the first paragraph of Article 72 of that directive (on the basis that there can be no comparables).

In essence, the Court has simply held that it cannot be held, as a matter of principle, that such services are so closely linked that they form, objectively, a single, indivisible economic supply and, consequently, a single supply. As the AG pointed out in their opinion, those services, even if they are provided together, appear each to have their own character and to be identifiable. Furthermore, the fact that an overall price was paid by each of the subsidiaries to Högkullen for all of the services which Högkullen provided to it was not decisive in relation to intra-group supplies since, “otherwise, the group would itself be able to influence the classification to be given to those supplies for VAT purposes by means of the remuneration arrangements agreed”.

Accordingly, the Court rejected the argument that an approach based on comparable services could not be applied in this case. Having held that the provision of management services was not necessarily a single supply precluding the use of a comparison method of valuation, the Court (perhaps unfortunately) chose not to go on to consider how an open market valuation should be approached in circumstances where such supplies do (on their facts) amount to a single supply.

AG opinion

It is worth noting that unlike the Court, the AG did go on to consider the question how to ascertain the 'full cost to the taxable person of providing the service' where there is no comparison price. Firstly, since this measure is one that is designed to prevent VAT avoidance, the AG noted that the costs to take into account are only those which have VAT charged on them. Only around 14m SEK (out of the 28m SEK total) costs incurred by the holding company were subject to VAT and this set a limit to the cost based open market valuation.

In any event, the AG rejected the tax authorities approach in this case of including all the expenditure in the period. An automatic, blanket inclusion of all expenditure incurred by the holding company would lead to incorrect results. The open market value must be calculated separately for each service and cannot therefore be determined on the basis of the total expenditure for a year. For example, costs of the future acquisition of a shareholding (or even a stock exchange listing of the holding company) bear no relation to the services provided to the subsidiaries and cannot affect the taxable amount in respect of those services. In addition, certain capital expenditure should not be recognised in the year of expenditure, but should be amortised over a longer period.

Comment

The open market provisions are implemented in the UK by VATA 1994 Schedule 6 paragraph 1. The AG's opinion is a useful appraisal of these provisions, suggested a pragmatic approach which allows for the use of comparable prices where available, excludes irrelevant expenditure and requires capital expenditure to be amortised over time. It is perhaps unfortunate that they were not endorsed by the Court.

The fact that all services provided by a parent company to its subsidiaries by way of management cannot, as a matter of principle, be treated as a single supply seems entirely obvious – a factual approach taking into account all of the circumstances is required to justify a single supply analysis. However, it is perhaps worth noting that the recent UT decision in JP Morgan Chase did endorse an approach which treated intra-group supplies between two UK entities under a global master services agreement as constituting a single taxable supply for VAT purposes based on the fact that those supplies were so closely linked that they formed (when viewed objectively) a single, indivisible economic supply which it would be artificial to split. In particular, the UT concluded that the FTT had not approached the reference to a single economic purpose at too broad or high a level on the basis that the identified aim (carrying on business in a regulatorily compliant way) was a generic aim that could be applied to any business.