Holding Companies and Disposals of Shareholdings: When VAT Applies and When It Does Not

Holding companies appear to be the most common way in which groups are organised, even small ones: a company that neither sells nor produces anything, but simply holds the shares in the operating companies, perhaps providing them with some services. When such a company disposes of a shareholding, the question that arises is only apparently simple: is that consideration subject to VAT, or does it fall entirely outside its scope? The answer is not a technical detail, because it determines how much input VAT the holding company can deduct and on what basis. And it is on this point that the European and Italian approaches, while starting from the same principles, end up diverging.

The shared starting principle. According to the Court of Justice of the European Union, a company that merely holds shareholdings and collects dividends does not carry on an economic activity: it is therefore not a taxable person for VAT purposes, and transactions in its shareholdings fall outside the scope of the tax. Things change if the holding company interferes in the management of its subsidiaries by providing them with administrative, financial or technical services for consideration: at that point it becomes a taxable person, and the disposal of the subsidiary it manages falls within the scope of VAT, albeit as an exempt supply. Up to this point, EU law and domestic law converge: the Italian Supreme Court, in order no. 5156/2021, adopted this very approach, holding that the disposal of shareholdings falls outside the scope of VAT unless it is carried out in order to interfere in the management of the company sold, or otherwise constitutes the direct and necessary extension of the business activity.

The problem of the "mixed" holding company. The complication arises when the holding company interferes only in some of its subsidiaries, while for others it confines itself to mere investment management. The Court of Justice of the European Union, ruling on the right of deduction (Marle Participations judgment, 2018), accepted that in such cases the same company may have, so to speak, two souls: an economic one, for the managed subsidiaries, and a non-economic one, for those merely held. Input VAT on general expenditure should therefore be apportioned between the two spheres using an objective criterion. If the same reasoning is applied to the disposal, the natural consequence would be that the sale of a managed subsidiary is subject to VAT (as an exempt supply), whereas the sale of a passively held subsidiary falls outside its scope.

In Italy, "partial" taxable status is not persuasive. Italian administrative practice, by contrast, appears to resist this split. Once a company holds a VAT number and carries on, even only in part, an activity relevant for VAT purposes, it tends to be regarded as a taxable person in all respects: each of its transactions, including disposals of shareholdings, therefore falls within the scope of VAT, and only rarely outside it. Starting from this automatic inclusion within the VAT subjective perimeter, the disposal is in any event exempt under art. 10, no. 4, of Presidential Decree 633/1972, but the issue then shifts to whether or not it affects the deduction pro rata under art. 19-bis of the same decree.

To answer this, it must be established whether one of the three conditions that keep the transaction out of the pro rata calculation is met.

The first is its occasional nature: if the holding company disposes of shareholdings only sporadically, the transaction does not affect, at least in theory, the flat-rate deduction percentage. There is, however, no fixed numerical threshold; the lower courts have considered, case by case and on a factual basis, the number of disposals in the year and the amount of the consideration, without however identifying an abstract general rule.

The second is extraneousness to the company's own business: for the tax authorities, a company's "own business" is only the activity for which it is known on the market, regardless of what appears formally. Accordingly, a subsidiary held purely for investment purposes would be extraneous to the company's own business, whereas holding a strategic shareholding (for example, because it is related to the company's own operating sector) would be drawn into the typical activity of the parent company ab origine.

The third is its ancillary nature in relation to taxable transactions: EU case law has interpreted this requirement by considering whether the set of activities connected with the subsidiary absorbs a dedicated structure and significant costs, in which case it is relevant for pro rata purposes, or whether it represents a marginal use of resources, in which case it remains ancillary and irrelevant. The Court of Justice of the European Union has, however, also made clear that a transaction can never be regarded as ancillary if it constitutes the direct, permanent and necessary extension of the business activity: where the disposal of shareholdings is, in practice, the way in which the holding company pursues its corporate purpose, ancillary nature is ruled out from the outset.

Conclusion. As a matter of prudence, in Italy it is advisable to confine the out-of-scope treatment to genuinely exceptional cases: the textbook example is the purely passive holding company, which merely holds shareholdings and does not invoice any supplies to them. In all other cases it is advisable to treat the disposal as exempt and to focus on the pro rata, carefully examining the number and frequency of disposals, the absence of a dedicated structure, and whether the subsidiary sold is extraneous to the activity for which the company is known on the market. It is on these elements, rather than on the theoretical classification of taxable status, that the VAT deduction is actually decided in practice.