© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
E6. Investment and economic activity
ACQUISITION OF SECURITIES
- Mere acquisition and holding of shares is not an economic activity
"[44] With regard to the ‘redemption’ of the shares, it is the settled case-law of the Court that the mere acquisition and holding of shares are not to be regarded as an ‘economic activity’ within the meaning of the VAT Directive. Indeed, the mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefrom on a continuing basis because any dividend yielded by those holdings is merely the result of ownership of the property and is not the consideration for any economic activity within the meaning of that directive (judgment of 26 May 2005, Kretztechnik, C‑465/03, EU:C:2005:320, paragraph 19 and the case-law cited)." (Polfarmex C-421/17)
- Acquisition of shares for purpose of obtaining income through dividends is mere result of ownership, not economic activity
"[19] It is settled case‑law that the mere acquisition and holding of shares is not to be regarded as an economic activity within the meaning of the Sixth Directive. The mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefrom on a continuing basis because any dividend yielded by that holding is merely the result of ownership of the property and is not the product of any economic activity within the meaning of that directive (see Harnas & Helm, paragraph 15; KapHag, paragraph 38, and Case C-8/03 Banque Bruxelles Lambert (BBL) [2004] ECR I‑0000, paragraph 38)..." (Kretztechnik C-465/03)
- Mere acquisition and sale of negotiable securities not economic activity
"[39] Likewise, the simple acquisition and the mere sale of other negotiable securities cannot amount to exploitation of an asset for the purpose of obtaining income on a continuing basis, the only consideration for those transactions consisting of a possible profit on the sale of those securities (see EDM, paragraph 58).
[40] As a rule, such transactions cannot, by themselves, constitute economic activities within the meaning of the Sixth Directive." (BBL C-8/03)
- Acquisition and holding of bonds no different to shares
"[18] In that regard, as the Netherlands Government has rightly pointed out, the activity of a bondholder may be defined as a form of investment which does not extend further than straightforward asset management. The income from the bonds derives from the mere fact of holding them, which entitles the holder to payments of interest. Such interest cannot, therefore, be regarded as a return on an economic activity or transaction carried out by the bondholder, since it derives from the mere ownership of the bonds.
[19] There is thus no reason to treat bondholding differently from shareholding. That is why Article 13B(d)(5) mentions both shares and debentures as covered by an exemption." (Harnas & Helm C-80/95)
HOLDING OF SHARES
- Yield from placements in investment funds not consideration
"[63] As regards the yield from placements in investment funds, it must be held that it does not constitute direct consideration for supplies of services consisting in making capital available for the benefit of a third party (see Régie dauphinoise, paragraphs 16 and 17). Like dividends, such yield cannot be regarded as the effective exchange for services rendered. Consequently, those placements do not constitute supplies of services 'effected for consideration', within the meaning of Article 2(1) of the Sixth Directive, and therefore do not come within the scope of VAT (see, to that effect, Case C-305/01 MKG-Kraftfahrzeuge-Factoring [2003] ECR I-6729, paragraph 47)." (EDM C-77/01)
SALE OF SHARES
- If acquisition of shares is not economic activity, same is true of sale of those shares (including buy-back by company)
"[45] If, therefore, the acquisition of financial holdings in other undertakings does not in itself constitute an economic activity within the meaning of that directive, the same must be true of activities consisting in the sale of such holdings (judgment of 20 June 1996, Wellcome Trust, C‑155/94, EU:C:1996:243, paragraph 33)." (Polfarmex C-421/17 - buy-back of shares not economic activity)
"[19] ... If, therefore, the acquisition of financial holdings in other undertakings does not in itself constitute an economic activity within the meaning of that directive, the same must be true of activities consisting in the sale of such holdings (see Case C-155/94 Wellcome Trust [1996] ECR I-3013, paragraph 33; KapHag, paragraph 40, and BBL, paragraph 38)." (Kretztechnik C-465/03)
- Obtaining income on continuing basis from activities going beyond simple acquisition + sale can be economic activity
"[20] On the other hand, transactions that consist in obtaining income on a continuing basis from activities which go beyond the compass of the simple acquisition and sale of securities, such as transactions carried out in the course of a business trading in securities, do fall within the scope of the Sixth Directive but are exempted from VAT under Article 13B(d)(5) of that directive (see Case C-77/01 EDM [2004] ECR I-0000, paragraph 59, and BBL, paragraph 41)." (Kretztechnik C-465/03)
"[41] However, it follows from Article 13B(d)(5) of the Sixth Directive that transactions affecting securities may come within the scope of VAT. The Court has already held that the transactions covered by that provision are those which consist in drawing revenue on a continuing basis from activities which go beyond the compass of the simple acquisition and sale of securities, such as transactions carried out in the course of a business trading in securities (see EDM, paragraph 59)." (BBL C-8/03)
SECURITIES TRADING
- Open-ended investment company does carry on economic activity
"[42] It follows from Article 1(2) of Directive 85/611 that the transactions carried out by SICAVs consist in the collective investment in transferable securities of capital raised from the public. With the capital provided by subscribers when they purchase shares, SICAVs assemble and manage, on behalf of the subscribers and for a fee, portfolios consisting of transferable securities.
[43] Such an activity, which goes beyond the compass of the simple acquisition and the mere sale of securities and which aims to produce income on a continuing basis, constitutes an economic activity within the meaning of Article 4(2) of the Sixth Directive.
[44] It follows that SICAVs are taxable persons within the meaning of Article 4 of the Sixth Directive." (BBL C-8/03)
At least where it charges entry and/or exit commission
"[27] As regards the relationship between the UCITS and its participants, BBL argues that UCITS can be distinguished from the other economic operators in the financial markets, inasmuch as they actively promote the marketing of their own units. When the units are marketed, the UCITS charge a fee, known, as appropriate, as entry commission or exit commission. That commission is the counterpart of a right of access or withdrawal on the part of the subscriber to the UCITS and the provision of the services connected with that access or withdrawal." (BBL C-8/03 - query, therefore, what the supply is - share dealing or investment management)
- Charitable trust forbidden from engaging in commercial share-dealing or involvement in management (therefore treated the same as private investor)
"[35] It is true that, by virtue of Article 13B(d)(5) of the Directive, transactions in shares, interests in companies or associations, debentures and other securities may fall within the scope of VAT. This will be the case, in particular, where such transactions are effected as part of a commercial share-dealing activity or in order to secure a direct or indirect involvement in the management of the companies in which the holding has been acquired (Polysar Investments Netherlands, cited above, paragraph 14). However, as is clear from the order for reference, the Trust is forbidden to engage in precisely such activities, being required to make all reasonable efforts to avoid engaging in trade when exercising its powers and being precluded from taking majority holdings in other companies.
[36] Consequently, and irrespective whether the activities in question are similar to those of an investment trust or a pension fund, the conclusion must be that a trust which is in a position such as that described by the referring tribunal must, in the light of Article 4 of the Directive, be regarded as confining its activities to managing an investment portfolio in the same way as a private investor." (Wellcome Trust C-155/94)
- Undertaking confining itself to simple sale of shares to be regarded as managing investment portfolio in same way as a private investor
"[60] It follows that an undertaking which pursues activities consisting in the simple sale of shares and other negotiable securities, such as holdings in investment funds, is to be regarded, so far as those activities are concerned, as confining itself to managing an investment portfolio in the same way as a private investor (see Wellcome Trust, cited above, paragraph 36)." (EDM C-77/01)
- Neither the scale nor employment of consultancy undertakings constitute criteria for distinguishing from private investor
"[61] It is important to observe in that regard that neither the scale of a share sale, nor the employment in connection with such a sale of consultancy undertakings, can constitute criteria for distinguishing between the activities of a private investor, which fall outside the scope of the Sixth Directive, and those of an investor whose transactions constitute an economic activity (see Wellcome Trust, paragraph 37)." (EDM C-77/01)
- Query the status of pension funds etc.
"In the case of Wellcome Trust Ltd (VBNB72900) the European Court of Justice considered the purchase and sale of shares, and other securities, by a trustee that was managing the assets of a charitable trust.
The Court found that this was not an economic activity within the meaning of Article 4(2) of the Sixth Directive. As a result tax paid on the cost of such disposals could not be claimed as input tax.
This ruling potentially has widespread application. It could be seen to apply to all businesses, pension funds and other organisations that carry on such activities wholly for investment purposes.
However HMRC does not wish to draw such a wide interpretation. Instead we only apply the ruling when a business:
disposes of its own shares; and
uses the income gained for non-business purposes." (VBNB29000)
- Fact that investment activity done in the same way as private investor does not mean it is a private activity (can be non-economic business activity)
"[43] In the present case, as is apparent from the information provided by the referring tribunal, it is common ground that the non-economic activity carried out by WTL, which consists of the purchase and sale of shares and other securities in the course of the management, as trustee, of the assets of the Wellcome Trust, is a business activity, not a private activity, and that it is exclusively for the purposes of that business activity that the investment management services are supplied to WTL by a person established outside the European Union.
...
[48] It is true that the Court has held that a trustee which is in a position such as that of WTL must, in the light of Article 9 of the VAT Directive, be regarded as confining its activities to managing an investment portfolio in the same way as a private investor (see, by analogy, judgment of 20 June 1996, Wellcome Trust, C‑155/94, EU:C:1996:243, paragraph 36).
[49] However, it cannot follow from the fact that, in managing an investment portfolio, WTL carries out activities similar to those carried out by a private investor, that WTL is carrying out those activities on a private basis.
[50] As is apparent from paragraph 43 above, since that non-economic activity of WTL is not a private activity, its position is not comparable to that of persons who acquire services solely for their own personal use or that of their staff. Unlike them, WTL is, as a taxable person, covered by the common system of VAT." (Wellcome Trust C-459/19)
Investing as a direct continuation of another activity
- Investment of donations as a direct continuation of non-economic activity of raising donations
"[29] Both the activity consisting in the investment of donations and endowments, and the costs associated with that investment activity must be treated in the same way for VAT purposes as the non-economic activity consisting in the collection of donations and endowments and any costs associated with the latter. Not only does such financial investment activity constitute, for the University of Cambridge, much like a private investor, a means of generating income from the donations and endowments raised, but it is also an activity that may be directly linked to their collection and, consequently, is merely a direct continuation of that non-economic activity. Accordingly, input VAT paid in respect of the costs associated with that investment is also non-deductible." (University of Cambridge C-316/18)
ISSUE OF SHARES
- Issue of shares is not a supply for consideration and not economic activity
"[26] As the Advocate General rightly observes in points 59 and 60 of his Opinion, a company that issues new shares is increasing its assets by acquiring additional capital, whilst granting the new shareholders a right of ownership of part of the capital thus increased. From the issuing company’s point of view, the aim is to raise capital and not to provide services. As far as the shareholder is concerned, payment of the sums necessary for the increase of capital is not a payment of consideration but an investment or an employment of capital.
[27] It follows that a share issue does not constitute a supply of goods or of services for consideration within the meaning of Article 2(1) of the Sixth Directive. Therefore, such a transaction, whether or not carried out in connection with admission of the company concerned to a stock exchange, does not fall within the scope of that directive." (Kretztechnik C-465/03)
- Query whether the issue + redemption of shares in open ending investment company is a supply for consideration
""[27] As regards the relationship between the UCITS and its participants, BBL argues that UCITS can be distinguished from the other economic operators in the financial markets, inasmuch as they actively promote the marketing of their own units. When the units are marketed, the UCITS charge a fee, known, as appropriate, as entry commission or exit commission. That commission is the counterpart of a right of access or withdrawal on the part of the subscriber to the UCITS and the provision of the services connected with that access or withdrawal.
...
[42] It follows from Article 1(2) of Directive 85/611 that the transactions carried out by SICAVs consist in the collective investment in transferable securities of capital raised from the public. With the capital provided by subscribers when they purchase shares, SICAVs assemble and manage, on behalf of the subscribers and for a fee, portfolios consisting of transferable securities.
[43] Such an activity, which goes beyond the compass of the simple acquisition and the mere sale of securities and which aims to produce income on a continuing basis, constitutes an economic activity within the meaning of Article 4(2) of the Sixth Directive.
[44] It follows that SICAVs are taxable persons within the meaning of Article 4 of the Sixth Directive." (BBL C-8/03)
PARTNERSHIP INVESTMENT
- Investment in partnership not a supply for consideration
It follows that the entry of a new partner into a partnership in consideration for a contribution in cash, in circumstances such as those of the main case, does not constitute an economic activity, within the meaning of the Sixth Directive, on the part of the partner." (KapHag C-442/01)
- Transfer of partnership share not a supply for consideration
"[40] If the taking of shares does not in itself constitute an economic activity within the meaning of the Sixth Directive, the same must be true of activities consisting in the transfer of such shares (Case C-155/94 Wellcome Trust [1996] ECR I-3013, paragraph 33).
[41] The admission of a new partner into a partnership does not therefore constitute a supply of services to him.
[42] In that context, it is irrelevant whether the admission of the new partner must be regarded as the act of the partnership itself or as that of the other partners, since the admission of a new partner does not in any event constitute a supply of services for consideration for the purposes of the directive." (KapHag C-442/01)
CONSORTIA
- Contributions to consortium in excess of member's duty is supply for consideration if fee is paid
"[88] Consequently, operations such as those at issue in the main proceedings, carried out by the members of a consortium in accordance with the provisions of a consortium contract and corresponding to the share assigned to each of them in that contract, do not constitute supplies of goods or services 'effected for consideration' within the meaning of Article 2(1) of the Sixth Directive, nor, consequently, a taxable transaction thereunder. The fact that such operations are carried out by the member of the consortium which manages it is irrelevant in that respect.
[89] On the other hand, where the performance of more of the operations than the share thereof fixed by the said contract for a consortium member involves payment by the other members against the operations exceeding that share, those operations constitute a supply of goods or services 'effected for consideration' within the meaning of Article 2(1) of the Sixth Directive." (EDM C-77/01)
LENDING
Loans to subsidiaries
- Lending not the same as investing in equity as it involves making capital available for benefit of third party
"[65] On the other hand, in accordance with the Court's case-law, interest received by a holding company in consideration of loans granted to companies in which it has shareholdings cannot be excluded from the scope of VAT, since that interest does not arise from the simple ownership of the asset, but is the consideration for making capital available for the benefit of a third party (see, to that effect, Régie dauphinoise, paragraph 17)." (EDM C-77/01)
- Annual granting of loans to subsidiaries can amount to an economic activity
"[66] As regards the question whether, in such a situation, a holding company supplies that service in the capacity of a taxable person, the Court has held, at paragraph 18 of the judgment in Régie dauphinoise, that a person carrying out transactions which constitute the direct, continuous, and necessary extension of the person’s taxable activity, such as the receipt by a managing agent of interest resulting from the placements of monies received from clients in the course of managing those clients’ properties, acts in that capacity.
[67] That is with stronger reason the case when the transactions concerned are carried out with a business or commercial purpose characterised by, in particular, the wish to maximise returns from capital invested.
[68] It is clear that an undertaking acts thus if it uses funds forming part of its assets to supply services constituting an economic activity within the meaning of the Sixth Directive, such as the granting of interest-bearing loans by a holding company to companies in which it has shareholdings, whether those loans are granted as economic support to those companies or as placements of treasury surpluses or for other reasons.
[69] Interest paid to an undertaking in consideration of bank deposits or placements in securities such as Treasury notes or certificates of deposit likewise cannot be excluded from the scope of VAT, since the interest paid does not arise from the simple ownership of the asset but constitutes the consideration for making capital available for the benefit of a third party (see, to that effect, Régie dauphinoise, paragraph 17). It follows from the preceding paragraph that an undertaking [70] Therefore, it must be held that the annual granting by a holding company of interest-bearing loans to companies in which it has a shareholding and placements by that holding company in bank deposits or in securities, such as Treasury notes or certificates of deposit, constitute economic activities carried out by a taxable person acting as such within the meaning of Articles 2(1) and 4(2) of the Sixth Directive." (EDM C-77/01)
- Distinguish the mere acquisition and holding of bonds
"[20] The answer to the first question must therefore be that Article 4(2) of the Sixth Directive is to be interpreted as meaning that the mere acquisition of ownership in and the holding of bonds, activities which are not subservient to any other business activity, and the receipt of income therefrom are not to be regarded as economic activities conferring on the person concerned the status of a taxable person." (Harnas & Helm C-80/95)
- Or only where transaction carried out to maximise returns from capital
" [28] Where a holding company makes capital available to its subsidiaries, that activity may of itself be considered an economic activity, consisting in exploiting that capital with a view to obtaining income by way of interest therefrom on a continuing basis, provided that it is not carried out merely on an occasional basis and is not confined to managing an investment portfolio in the same way as a private investor (see, to that effect, Case C-155/94 Wellcome Trust v Commissioners for Customs and Excise [1996] ECR I-3013, at paragraph 36; and Case C-230/94 Enkler v Finanzamt Homburg [1996] ECR I-4517, paragraph 20) and provided that it is carried out with a business or commercial purpose characterised by, in particular, a concern to maximise returns on capital investment." (Floridienne C-142/99)
OTHER
Secondment of staff
- Secondment of staff at cost is supply for consideration
"[30] In the light of all the foregoing considerations, the answer to the question referred is that Article 2, point 1, of the Sixth Directive must be interpreted as precluding national legislation under which the lending or secondment of staff of a parent company to its subsidiary, carried out in return for only the reimbursement of the related costs, is irrelevant for the purposes of VAT, provided that the amounts paid by the subsidiary to the parent company, on the one hand, and that lending or secondment, on the other, are interdependent." (San Domenico Vetraria C-94/19)