Denmark Recovery of VAT for Holding companies

A holding company is found to lack economic substance where it outsources the management services provided to its subsidiaries.

The Danish National Tax Board recently issued a ruling with respect to holding companies actively involved in the management of their subsidiaries. The ruling is of particular interest with regards to M&A-transactions and bidding companies’ right of VAT recovery on deal costs.

A bidding company purchased management services from its parent company. These services where subsequently supplied to its subsidiaries. The bidding company had no staff, and, besides the outsourcing of management services, its activity was limited to shareholding (for which it received dividend income) and financing (for which it received interest income).

The Danish National Tax Board found that the management services were de facto provided by the parent company directly to the subsidiaries of the Bidding company, which lacked the necessary substance to be providing management services.

Key takeaway

This ruling is a reminder that the right for holding companies to recover input VAT, in particular in the context of deal transactions and restructuring, must always be carefully analysed and care must be taken as to whether that right is economically justified with an adequate level of substance.