VAT Recovery Position in Ireland for Holding Companies
Under Irish VAT law, a business can recover VAT on costs to the extent that those costs are used for making taxable supplies.
A pure holding company (one that holds shares in subsidiaries and does not provide services for consideration) is generally not engaged in economic activity and cannot recover VAT.
Examples of non-economic activities include:
- Simply holding shares in other companies.
- Receiving dividends or capital gains without providing services.
However, a holding company may recover VAT if it engages in any of the following economic activities:
- Providing taxable management or administrative services to subsidiaries.
- Charging for advisory or technical services.
- Involvement in transactions such as restructures, mergers, or acquisitions, provided these are carried out as part of a taxable business.
Revenue v Covidien Ltd [2024] IEHC 192
The recent case of Revenue v Covidien Ltd highlighted the importance for companies to demonstrate a clear and direct link between input costs and taxable outputs to justify VAT recovery.
- If the services received are used for taxable activities, VAT is generally recoverable.
- If the services relate to both taxable and non-taxable activities, VAT may only be partially recoverable — apportionment is required.
The Court of Appeal, in its decision dated 31 March 2025, found in favour of the Revenue Commissioners overturning the earlier High Court ruling that had allowed Covidien to recover VAT on certain corporate transaction costs.
The decision potentially denies the taxpayer a VAT refund of €45.9 million, and creates uncertainty and complexity for taxpayers involved in corporate transactions in Ireland.
Facts of the case
Covidien had claimed a VAT refund of €45.9 million for input VAT incurred on services received from Tyco Healthcare Group LP, a U.S. affiliate, related to two major corporate projects: "Project Jameson" and the "Medtronic transaction."
The Revenue Commissioners denied the claim, arguing that the services were not directly linked to Covidien's taxable activities. The Tax Appeals Commission and the High Court initially ruled in favour of Covidien, recognizing the VAT as deductible.
However, the Court of Appeal overturned these decisions, emphasizing the necessity of a direct and immediate link between input costs and taxable outputs for VAT recovery.
Keys Reasons for the Court of Appeal’s Decision
- Misapplication of Legal Tests by the TAC: The Court determined that the Tax Appeals Commission (TAC) had erred in law by not correctly applying the necessary legal tests for VAT deductibility. Specifically, the TAC failed to properly assess whether there was a "direct and immediate link" between the input costs (services received from Tyco Healthcare Group LP) and Covidien's taxable output activities.
- Inadequate Application of the "Used For" Test: The Court emphasized the importance of the "used for" test, which examines whether the input services were actually used for the provision of taxable outputs. The TAC's analysis was found lacking in this regard, as it did not sufficiently consider how the services were utilized in relation to Covidien's economic activities.
- Overlooking Non-Economic Activities: The Court noted that Covidien was engaged in both economic (e.g., providing management services to subsidiaries) and non-economic activities (e.g., passive holding of shares). The TAC did not adequately distinguish between these activities when assessing VAT recovery, leading to an incorrect conclusion that all input VAT was recoverable.
- Remission for Reassessment: Given these errors, the Court remitted the case back to the TAC for a comprehensive reassessment under the correct legal framework. This includes a thorough evaluation of the extent to which the input services were used for taxable activities and whether any VAT recovery is justified.
Implications
The Court of Appeal's decision underscores the necessity for holding companies to demonstrate a clear and direct link between input costs and taxable outputs to justify VAT recovery. It also highlights the importance of distinguishing between economic and non-economic activities within a company's operations.
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