25 november 2009
Important ECJ Case-law on the disposal of shares Â– Deduction of input VAT allowed?
The European Court of Justice (ECJ) has recently released an important judgement that is of interest to holding companies.
Background of the case:
This case relates to the Swedish holding company of an industrial group (SKF) which plays an active role in the management of its subsidiaries. This holding company supplies services for a consideration to its subsidiaries, notably services in the area of management, administration and marketing policy. Those services are supplied with VAT.
SKF intends to restructure its shareholding and to dispose of its shareholding in its subsidiaries. The reason for those disposals is to obtain funds to finance other activities of the group. SKF sought to obtain clarification on the tax consequences of this restructuring with the Swedish Revenue Law Commission, most notably with respect to the deduction of input VAT on costs incurred for the purposes of this restructuring. Services acquired by SKF, and for which the question of the deduction of VAT arises, are in the area of valuation of shares, assistance with negotiation and specialized legal advice for the drafting of the contracts.
The main findings of this case can be summarized as follows:
- The disposal by a parent company of all its shares in subsidiaries in which it plays an active management role is an economic activity within the scope of VAT.
- This type of disposal of shares is VAT exempt.
- Input VAT on costs incurred for the purposes of such disposal of shares can be (partially) deducted to the extent that there is a direct and immediate link between these costs and the overall activities of the active holding company.
- In order to establish whether there is such a direct and immediate link, it is necessary to ascertain whether the costs incurred are likely to be incorporated in the price of the shares or whether they are only among the cost components of the holding’s products.
- Under some circumstances, a disposal of shares in subsidiaries in which a holding plays an active management role can be qualified as a transfer of going concern outside the scope of VAT. Under this approach, input VAT on costs incurred for the purposes of such disposal can be (partially) deducted.
This ECJ case law is very important for holding companies. It creates opportunities to deduct, at least partially, input VAT incurred within the framework of share disposals. The deduction of input VAT is however not straightforward as it must be considered in the light of all the circumstances surrounding such transactions.
Considering the prolific and complex ECJ jurisprudence applicable to holding companies, the deduction of input VAT must be considered with attention and must be carefully planned. Without the appropriate level of focus, holding companies are very likely to suffer from an indomitable VAT cost which can amount to millions of euros.
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