The Cyprus Tax Authorities issued on 9 January 2018 a circular concerning the VAT treatment of holding companies. The main provisions of the circular are summarised below.
How are holding companies considered for VAT purposes?
Merely holding shares (or similar interest) in other companies, does not meet the definition of business activity. This is because holding is not considered as an exploitation of the asset for producing income on a continuous basis, as dividend income is considered to be derived solely from the ownership of that asset. Therefore, a company purely engaged in the holding of interest in another company is not regarded as a taxable person for VAT purposes. This has been the practice so far, so there is nothing new in this respect.
Can holding companies be considered differently for VAT purposes?
This is where the newly issued circular comes in! The above mentioned principle does not apply, in cases where holding one or more participations is accompanied with a direct or an indirect involvement in the management of those companies.
The existence of direct or indirect involvement in management has not been defined with certain criteria and it is to be considered based on the facts of each case. Based on the usual meaning of the term “management” or “administration” this may involve coordination or handling of various matters, leadership towards a certain direction, organization, decision-making etc. These actions may be taken directly by the holding company or indirectly by any person acting on its behalf. Any involvement in the management of participations must be supported by actual facts (for example common directors between the holding company and the participations, minutes of meetings in which decisions are taken, etc.).
It is acknowledged in the circular that the purpose of holding shares in other companies is not always to control those investments. As it is also supported by relevant case law, receipt of dividend income can be the sole purpose for investing in other companies, without being involved in their management. However, a holding company may influence the decisions of its participations, for example on any investments made. In such cases, given there is factual support, then any dividend income received from those investments might be regarded as a consideration for the provision of management services to them.
As mentioned above, whether a holding company manages its participations depends on the facts of each case. To that respect, the holding company must have the human resources and technical means to manage its investments. It should be noted that the holding company can purchase services in relation to the management of its participations.
In cases where a holding company charges fees to its participations for provision of management services, then the holding company is considered as a taxable person and must apply the normal VAT rules for the provision of such services. In such cases, the non-business person status of the holding company changes to that of a taxable person status, due to the consideration received for the management services provided.
Recovery of VAT suffered by holding companies
Where a holding company purchases legal, management, promotional and other services from third parties it can not claim any VAT suffered unless those services are used for the provision of taxable supplies of goods or services. The VAT suffered can not be recovered if the services are obtained for the benefit of participations without any charge by the holding company to them in relation to the services. The same holds for any VAT suffered on services obtained to secure financing for making investments in subsidiaries and for providing management services to them. If the holding company provides both taxable and non-taxable supplies then any VAT suffered can be apportioned based on the related VAT provisions.