Holding companies that also provide management to their subsidiaries can deduct VAT on expenses to legal assistance relating to the acquisition of those subsidiaries – but not relating to divestment of these.
Holding- and investment companies that solely have an activity of owning shares in other companies are not subject to VAT and are unable to reclaim input VAT.
On the contrary, if the holding- or investment company provides services subject to VAT to its subsidiaries they can deduct VAT on expenses related to legal and auditor’s fees in connection with acquisition of subsidiaries. For that reason, it is not unusual that the group management including finance, HR and IT are handled by the parent company which receives administration fees subject to VAT from the subsidiaries.
Selling a business
At first it seems correct that an actively involved holding company, entitled to deduct VAT on legal and auditor fees in relation to an acquisition of a subsidiary, would have the right to deduct VAT on such expenses at a later divestment of the subsidiary. However, this is not the case according to a recent ruling from the Danish National Tax Tribunal.
The case revolved around a group in the wind power industry with a parent company handling all group functions such as management, finance and administration of the subsidiaries against an annual total fee of DKK 10,000,000 subject to VAT.
In relation to the divestment of a subsidiary, the parent company had expenses for legal and auditor’s assistance of around DKK 2,300,000 of which DKK 475,083 was VAT. The company was of the opinion that the VAT was deductible arguing that the expenses were overhead expenses related to the overall economic activity of the parent company.
The Danish National Tax Tribunal, on the contrary, did not agree. The Tribunal agreed with the Danish Tax Agency, saying that the expenses could be linked directly and immediately to the sale of shares. Therefore, the expenses could not be qualified as VAT deductible overhead expenses.
VAT on lawyer’s fees?
Back in 2018, the National Danish Tax Board determined that lawyers should not include VAT on invoices for assistance in relation to a divestment of a company by way of a share deal because a sale as such is a transfer of securities. Instead, the lawyers were deemed to pay the special Danish tax on labor costs on the part of the earnings related to such assistance.
In the case from 2018, the lawyer’s assistance had mandate to negotiate on behalf of the seller. The lawyer played an essential part of the contact to the buyer and the buyer’s representatives in order to accomplish the best terms for the seller.
In a more recent case from 2020, The National Tax Board has specified that the invoicing of legal assistance exempt from VAT requires that the lawyer is authorized by the client to negotiate the terms of the contract or has a power of attorney to enter into an agreement to settle the transaction.
It might seem like the National Tax Board has sharpened the requirements of the area’s practice with the case from 2020 but the effect of the case is difficult to assess. Nevertheless, we always recommended that the engagement letters include a clear scope and mandate with respect to lawyer’s assistance.