In its ruling A-1477/2024 of July 4, 2025, the Federal Administrative Court commented for the first time on the FTA's administrative practice regarding input tax deduction in connection with investments. The focus was on the interpretation of Article 29(2) of the VAT Act. The point of contention was whether this provision merely repeats the general principle of Article 28(1) of the VAT Act. – according to which all input tax incurred in the course of business activities is eligible for input tax deduction – or whether, as the FTA assumes, it provides for a restriction and links the input tax deduction in the area of shareholdings to the company's other business activities.
FACTS OF THE CASE
The proceedings were based on the case of an investment company that had claimed significant input tax in connection with the acquisition, holding, and sale of qualified participations. The company allocated these expenses directly to "pot A" under the so-called 3-pot method, i.e., the area with full input tax deduction. The FTA, on the other hand, following its practice (see VAT Info 09, section 9.3.1), took the view that the input tax must be allocated to "pot C," which is subject to an “appropriate” correction. The FTA applied the turnover key, which ultimately meant that the company was only able to deduct a fraction of the input tax incurred.
ASSESSMENT BY THE FEDERAL ADMINISTRATIVE COURT
A-1477/2024 vom 4. Juli 2025
The Federal Administrative Court confirmed the FTA's view in principle. It clarified that, with the wording "within the scope of business activities entitling to input tax deduction" in Article 29(2) of the VAT Act, the legislator did indeed intend to restrict the right to deduct input tax. The input tax deduction for expenses related to shareholdings cannot therefore be considered in isolation, but must always be assessed in the context of the entire business activity. A direct and unrestricted allocation of such costs to "pot A" within the framework of the 3-pot method is excluded.
In a second step, however, the court dealt with the question of which method should be used to correctly adjust the input tax. Here, it clearly contradicted the FTA: in this specific case, the turnover key did not lead to a appropriate result, as it only took into account areas from which turnover from services resulted. However, the acquisition and holding of shareholdings typically leads to dividends and investment income, which are not classified as turnover for VAT purposes. This means that a significant part of the company's business activity is ignored, which leads to an objectively unjustifiable distortion.
The case was therefore referred back to the FTA so that it could determine a more appropriate key. In particular, the court referred to the possibility of using the balance sheet structure as a basis, i.e., the weighting of the investments in relation to the company's other assets.
CONCLUSION
In practice, the decision has two implications. On the one hand, it confirms the FTA's restrictive line, according to which expenses related to shareholdings cannot be directly allocated to the full input tax deduction. On the other hand, it opens up scope for choosing the correction method: taxpayers can explain why alternative keys are more appropriate than the turnover key in specific cases. For mixed holding companies, the challenge remains to correct input tax appropriately, while pure holding companies continue to enjoy privileged treatment.
As a result, the ruling provides clarity on the fundamental question of the scope of application of Article 29(2) of the VAT Act, but corrects the methodology chosen by the FTA. It is therefore worthwhile for affected companies to critically examine the input tax correction and, if necessary, to propose their own economically justified correction keys.
