Agefi Luxembourg - février 2026

AGEFI Luxembourg 6 Février 2026 Économie By Antonio MERINO, Counsel, VAT lead, Baker McKenzie Luxembourg O n 17 December 2025, the UK Supreme Court rejected an appeal filed by a holding company actively involved inmanag- ing its subsidiary. It determined that the input value-added tax (“VAT”) borne on the deal fees connectedwith an exempt share sale is not deductible, and hence represents a final cost due to the direct and im- mediate linkwith the share sale (and not themanage- ment activity). SomemightthinkthatthekeyVATdecisionin HMRC v. Hotel La Tour Ltd (1) (“ Hotel LaTour Ltd ”) is not rel- evant for holding companies established outside the UK— for instance, those carrying out their activities in an EUmember state such as Luxembourg. How- ever, even if the VAT Directive (2) no longer applies to the UK due to its withdrawal from the EU, the UK SupremeCourt’sdecision(dealtwithindetailbelow) has plenty of references to the VAT Directive and to caselawissuedbytheCourtofJusticeoftheEuropean Union (“ CJEU ”) in the past. In addition, some judgments rendered byUK courts have been landmark decisions that clarified the VAT treatment applicable in certain grey areas. For in- stance,theFirst-tierTribunaldecidedin2021 (3) theap- plicationofthe“openmarketvalue”andanalysedthe interactions betweenVATand transfer pricingon the supply ofmanagement serviceswithin a group. The decision inHotel La Tour Ltd The First-tier Tribunal and the Upper Tribunal en- dorsedthetaxpayer’sreasoning,whereasthecourtof appeal and the UK Supreme Court accepted the ar- guments made by HMRC. The decision in Hotel La Tour Ltd is notable because all competent judicial in- stancesintheUKfortaxlitigationwereexhausted,i.e., the First-tier Tribunal, the Upper Tribunal, the court of appeal and the UK Supreme Court. This means, amongotherthings,thatthetaxpayerandHMRChad theopportunitytosupporttheirreasoningwithmany arguments. In brief, a holding company actively involved in managingitsfullyownedsubsidiary—thesub- sidiary operating a hotel—decided to sell all of its shares to fundraise for developing a new hotel.Duringthesale,andasexpectedinprivate equity transactions, the active holding company requested lawyers, accountants and marketing services,andhenceboreinputVATontheir fees. It considered that the input VAT borne on these fees was deductible because it was connected to the overall hotel business, rather than the exempt sale of shares. The decision has aVAT grouping component that will not be tack- ledinthisarticle,sincethereason- ing included in the decision is not supported by case law issued by the CJEU. However, the appellant refers to the Kretztechnik (4) case to argue that (1) intra- group supplies should be disregarded, and (2) the sharesalecouldthereforebeseenaspartoftheparent company’s general economic activity. In detail, the UK Supreme Court upheld the court of appeal’s decision and considered that the share sale fell within the scope of VAT, as a direct, permanent and necessary extension of the hotel business carried out by the parent company. In its analysis, the UK SupremeCourtcounteractsthe“costcomponenttest”, noting that it ismerely descriptive and shouldnot be overinterpreted. The “cost component test” was ex- plained in the Volkswagen Financial Services judg- ment (5) and means that general overhead costs in purchase agreements are “cost components” of both taxable and exempt supplies. This allows for partial input VAT recoveryonoverheads, regardless of how the costs are allocated to customers. ThekeyconceptfortheUKSupremeCourtisthe“di- rect and immediate link” (6) detailed in the BLP judg- ment (7) renderedbytheCJEU.Ifataxablepersonbears input VAT on expenses connectedwith a transaction falling within the scope of VAT that is exempt, the amountsofVATshouldnotberecoverable.Onlyifno such link exists may the fees be treated as part of the taxpayer’s general economic activity, potentially al- lowing deductibility. According to the UK Supreme Court, a disposal of shares should be treated in the same way as an acquisition of shares, and it is irrele- vantthatthesaleproceedswereusedtofundataxable activity. Hence, the direct and immediate link test should not be modified in a share deal. What really countsforVATpurposesistheattributionofcosts,not the taxable person’s strategic intentions. The UK Supreme Court also mentions that the SKF judgment (8) does not create a special “fundraising ex- ception”allowingalook-throughwhenexemptshare sales fund taxable activities, and criticised that tri- bunals have generallymisappliedSKF. ALuxembourg perspective Luxembourg is well-known for being the largest in- vestment fund domicile in Europe and second glob- ally, as well as for being one of the most attractive jurisdictionsformultinationalgroupstoestablishtop- level holding companies. This is due to the extensive network of double tax treaties designed to prevent doubletaxationandfacilitatecross-borderinvestment. According to the current economic landscape,where interest rates remain high, holding companies incor- porated in Luxembourg are tempted to give prefer- ence to fundraising transactions instead of seeking external funding, or at least try to limit the latter as much as possible. Indeed, Luxembourg companies holdingseveralsubsidiariesactive,forinstance,inthe realestatebusinessorM&Awouldfinditappropriate to sell a subsidiary to obtain the necessary cash to fi- nance a newproject. Asareminder,theLuxembourgVATauthoritieshave alreadyshowntheirpreferenceforthedirectallocation method when it comes to deducting input VAT, i.e., theamountsofinputVATborneonexpensesbyatax- payer should be allocated when possible to specific output transactions.More precisely, CircularNo. 765 dated 15 May 2013 clarified the partial deduction of VAT on the purchase of goods and services that are used for carrying out taxed and exempt transactions. If applying the general pro rata based on turnover leads to a distortion in determining the deductible VAT, the taxable personmust, in principle, apply the “actual use” method first or the special pro rata method. The general pro rata method is only to be used for costs to which the other methods cannot be applied. Five years later, Circular No. 765-1 dated 11 June2018 confirmed that theseprinciples arealsoap- plicable to the deduction of VAT by “partial” taxable persons.“Partial”taxpayersarethosewho,ontheone hand, have an economic activity within the scope of VAT,suchasfinancialorrealestateservices,andwho, on the other hand, have a non-economic activity that is not within the scope of VAT, such as the “passive” ownershipof shares in subsidiaries. Therefore, Luxembourg taxablepersons involved in M&Aorrealestatetransactionsfaceadilemmafrom aVATperspective: either seekexternal funding from a third party—thus avoiding irrecoverable VAT on acquisition costs but incurring (high) interest on the loan(s) — or raise finance by disposing of shares, whichwould involve bearingVAT as a final cost on large advisory/legal fees invoiced by suppliers, but no payment of interest on the loan(s). As a conse- quence, Luxembourg taxable persons should have to carry out a cost-benefit analysis to determine the less costly alternative. Conclusion The decision in Hotel La Tour Ltd prevents taxable persons from attempting to reclassify taxable fees as general overheads simply because a share sale sup- ports future taxable activities. Even though it is very clear that the decision inHotel La Tour Ltd has no effect in Luxembourg due to the principleofterritoriality,itisrecommendedthatactive holding companies based in Luxembourg that will enter into fundraising transactions by selling shares carry out a cost-benefit analysis to assess the impact oftheirrecoverableVATtobeborne.Thosewhohave already entered into these transactions and applied a fullinputVATdeductionrightontransactioncostsbut havenot yet beenassessedby theVATauthorities are highly recommended to make an appropriate VAT provision andbe prepared for a potential audit. Indeed, since VAT is not only a vital revenue source for EUmember states but also plays a crucial role in funding EU initiatives, it would not be surprising if the VAT authorities target their audits toward active holding companies involved in private equity trans- actions and hence deducting significant amounts of inputVAT. It is unclearwhether thedecision inHotel La Tour Ltd will become the new spearhead of the VATauthorities,asoccurredpreviouslywithfixedes- tablishments or relationships between a head office andbranches. 1) HMRCv.HotelLaTourLtd . 2) Council Directive 2006/112/EC of 28 November 2006 on the commonsystemofvalue-addedtax. 3) HMRCv.JupiterAssetManagementGroupLtd . 4) Kretztechnik ,C-465/03,EU:C:2005:320. 5) VolkswagenFinancialServices(UK) ,C-153/17,EU:C:2018:845. 6)Inprinciple,inputVATisdeductibletotheextentitisconnected withtaxablesupplies. 7) BLP Group plc v. Commissioners of Customs & Excise , C-4/94, EU:C:1995:107. 8) SKF ,C-29/08,EU:C:2009:665. UK VAT decision in Hotel La Tour Ltd: Adirty trick for active holding companies! L e Premier ministre Luc Frieden et les autres dirigeants de l'Union euro- péenne sont convenus jeudi 12 février d'un éventail d'engagements destinés à flui- difier le fonctionnement dumarché unique afin de renforcer la compétitivité du bloc communautaire et de parer à la concurrence agressive des États-Unis et de la Chine. Réunis dans un château de l'est de la Belgique, les Vingt-Septontsoulignélanécessitéd'agirrapidement, demodifier les règles encadrant les fusions et rachats d'entreprises pour favoriser la création de "cham- pions" européens et d'alléger la bureaucratie du bloc, ont dit de hauts représentants. "Une Europe, unmarché (...) Voilà notre ambition", a déclaré la présidente de la Commission européenne, UrsulavonderLeyen,àl'issuedusommetorganiséà Alden Biesen. L'exécutif européen va présenter en marsunplandétaillantlesmesuresàmettreenoeuvre pour renforcer le marché unique, qui représente quelque 450 millions de consommateurs, avec l'idée que les chefs d'État et de gouvernement du bloc s'ac- cordent sur un calendrier. Parmi lesmesures, apréciséUrsulavonderLeyenen conférence de presse, figure une préférence pour le "Made in Europe" pour les achats publics effectués dans des secteurs stratégiques. La croissance écono- mique de l'UE est au ralenti par rapport aux États- UnisetàlaChine,tandisquel'innovationeuropéenne dansdes secteurs tels que l'intelligence artificielle (IA) estàlatraîne.Parailleurs,leblocestmissouspression parlesdroitsdedouaneetlesrestrictionssurlesexpor- tations imposés par ses concurrentsmondiaux. S'exprimant devant les journalistes, le chancelier alle- mand FriedrichMerz a déclaré après les discussions qu'il était important que l'UE agisse "rapidement et efficacement"."Cetengagementaétésoulignéunani- mementaujourd'huipartouslesparticipants"ausom- met, a-t-il ajouté. Ursula von der Leyen a fait savoir que Bruxelles entendait avancer sur le projet d'union des marchés financiers, avec l'objectif de permettre que quelque 10.000 milliards d'euros soient investis dans l'économie européenne. En cas d'incapacité à concrétiser rapidement ce projet avec tous les pays membres, la Commission œuvrera à regrouper au moins neuf États, a-t-elle précisé. "On va regarder ensemble en juin où on en est et sur certains sujets, si on n'avance pas à 27, en se donnant ledroitdefairedescoopérationsrenforcéespouraller plus vite", a déclaré le président français Emmanuel Macron, souhaitant que le sommet européen de juin prochain fasse officededate butoir pour prendredes décisions en commun. Si tous les pays membres aspirent à davantage de compétitivité,ilsnes'accordentpassurlamanièred'y parvenir,etcedepuisdesannées,àcommencerparle "tandem" franco-allemand, qui représente les deux premières économies du bloc. Mardi 10 février, EmmanuelMacronarenouvelésonappelàl'UEpour qu'elle consente à faire davantage d'emprunts com- muns afin de pouvoir investir à grande échelle et contester l'hégémonie du dollar. La France promeut égalementunestratégie"MadeinEurope"quifixerait un seuil minimal en matière de contenu européen dans les biens achetés avec des fonds publics. Berlin rejette les deux idées, estimant que la clé réside dans l'augmentation de la productivité plutôt que danslacréationdenouvellesdettes.L'Allemagnesou- ligne également la nécessité de conclure des accords commerciaux,parexempleavecleblocsud-américain Mercosur, ce que la France refuse en raison de l'op- positiondesesagriculteurs."Onpartagecesentiment d'urgence que notre Europe doit agir", a déclaré EmmanuelMacronàsonarrivéeàAldenBiesen,s'af- fichant au côté de FriedrichMerz avec qui les désac- cords sur les solutions envisageables pour relancer la machine européenne sont de notoriété publique. Le Premier ministre suédois Ulf Kristersson a abondé : "Il y a beaucoup de paroles et très peu d'actes, c'est l'occasiond'aumoins inverser cette ten- dance". Son homologue tchèque Andrej Babis a résumé la situation encore plus brutalement : "Des mots, des conférences, et aucune action." "Nous devons constituer un marché unique de l'énergie, c'est la seule solution", a ajouté ledirigeant tchèque, une idée partagée par de nombreux autres dirigeants alors que l'industrie européennedoit faire face à des prix de l'électricité plus de deux fois plus élevés qu'en Chine ou aux États-Unis. "Les coûts de l'énergie sont le principal problème de l'industrie européenne à l'heure actuelle", a estimé le Premier ministre belge Bart De Wever. "Nous ne sommes pas compétitifs et nous risquons de perdre les secteurs de la pétrochimie, de la sidé- rurgie, de la métallurgie qui sont la base de toute prospérité", a-t-il dit. Source :Reuters ,gouvernement.lu Les Vingt-Sept conviennent de fluidifier le marché unique face à la "tenaille" sino-américaine ©SIP/FrédéricSierakowski