Input VAT recovery possible on sales of shares in a subsidiary

9 November 2009

Summary

The European Court of Justice (ECJ) recently ruled on the sale of shares in a subsidiary. This decision is significant because it is the first from the ECJ to rule specifically on the VAT treatment of the sale of shares itself. Any business involved in the sale of shares as part of its business restructuring should consider the potential VAT recovery and application of the Transfer of a Going Concern’ (TOGC) provisions as a result of this decision.

Full article

As part of a group restructure, SKF intended to transfer all the shares it holds in its subsidiary and its 26.5% shareholding in a controlled company. SKF provides management and other services to both these companies, on which VAT is due. Anticipating the input VAT which it would incur in relation to such transactions, SKF asked for a preliminary decision from the Swedish court, that it could recover this VAT in full.

This was granted by the Swedish court on the basis that, as SKF provided taxable supplies to both its subsidiary and the controlled company, input VAT should be recoverable on the disposal of the businesses as it would have been on the acquisition of the businesses, even where the disposal takes place in stages (as with the controlled company). However, this ruling was appealed by the Swedish tax authorities. The Swedish court then referred questions to the ECJ.
 
ECJ's decision
In its decision, the ECJ ruled that:

  • the share disposals are transactions within the scope of VAT, i.e. they constitute an economic activity,
  • the share disposals are covered by the VAT exemption,
  • there is no right to deduct the input VAT related to the share disposals unless the input VAT incurred is a cost component of the economic activity of SKF as a whole, in which case the recovery will be according to the VAT recovery position of SKF, and
  • the transactions could qualify as a Transfer of a Going Concern’ (TOGC) and, if so, they do not constitute supplies for VAT purposes and any input VAT will be recoverable according to the pro rata percentage.

The ECJ also ruled that the VAT treatment, as stated above, is not affected where the disposal takes place in stages. The ECJ concluded, therefore, that the disposal of the shares is an exempt supply and associated input VAT is irrecoverable unless the input VAT is a cost component of the underlying economic activity or it can qualify as a TOGC.
 
Analysis
This decision is significant because it is the first from the ECJ to rule specifically on the VAT treatment of the sale of shares itself. In the BLP case, the ECJ, whilst ruling that input VAT directly linked to the sale of shares is not recoverable, did not address the specific VAT treatment of the supply.
 
The ECJ has ruled in this case that the sale of shares, where the seller is involved in the management of the subsidiary, can qualify as either an exempt sale of shares or as a TOGC.
 
If the sale of the shares falls within the exemption, the ECJ has concluded that, if there is a direct and immediate link between the input VAT incurred and the VAT exempt supply of the shares, then it follows that the input VAT is irrecoverable. It should be noted, however, that recovery is permitted to the extent such supplies fall outside the EU.

However, if the input VAT is a cost component of the economic activities of the seller, as a whole, such input VAT is recoverable according to the seller’s VAT recovery position. However, the ECJ has also ruled that such transactions can constitute a TOGC, where the requirements are met under national legislation. Not all Member States have implemented these provisions.
 
If the sale of the shares falls within the definition of a TOGC, and the input VAT relates to such TOGC, the input VAT can be recovered according to the seller’s overall VAT recovery position.
 
In the case of SKF, the ECJ decided that it was up to the referring court to determine whether the input VAT was directly attributable to an exempt supply. In doing so, the referring court should determine whether the costs on which the VAT was incurred are cost components of the economic activities of SKF as a whole, or cost components solely of the share disposals .
 
Implications
Currently, in some countries, VAT recovery is specifically agreed on such share disposals (e.g. the Netherlands) and in other countries, TOGC treatment may apply. This decision should now clarify the position, in so far as TOGC treatment is possible, together with the possibility of VAT recovery even where the disposal is deemed to be an exempt supply.
 
This case is relevant for any business disposing of shares in a business which it actively manages. In addition, the effect of such share disposals on the VAT recovery position of the business should be considered.
 
Actions
Any business involved in such transactions should consider the implications of this case to the circumstances, in particular:

  • the possibility of treating the costs associated with the transaction(s) as a cost component of the seller’s economic activities so that the VAT may be recoverable (in accordance with the VAT position of the business),
  • the potential application of the TOGC provisions so that the transaction may be treated as outside the scope of VAT with VAT recovery at the seller’s pro rata percentage rate,
  • the impact such share sales will have on the seller’s pro rata percentage, and
  • the possibility of applying this decision retrospectively, where applicable, to the extent that VAT recovery was previously denied.

Source: ECJ, 29 October 2009, C-29/08 (AB SKF).