No deduction of VAT on costs linked to the sales of shares by holding companies
On 8 November 2018, the Court has ruled in its C&D Foods decision (C-502/17) that a holding company, which invoices services to its sub-subsidiary, could not deduct the VAT incurred on the intended sales of shares of its subsidiary and sub-subsidiary. The Court bases its decision because the essential reason of the sale was to help the financial situation of the new proprietor of the company and on the absence of direct and immediate link of the VAT incurred with the taxable activities of the company. This decision contrasts with the recent decision RyanAir (C-249/17, 17 October 2018) where the Court accepted the deduction of the VAT incurred on costs related to an aborted acquisition of shares (see our input issued on 17 October 2018). It also diverges from the traditional holding jurisprudence. More importantly, the concept of “essential reason of the transaction” might further complicate the question of the VAT deduction for all taxpayers.
C&D Foods, a Danish company, held 100 percent of the shares in Arovit Holding, which, in turn, held all of the shares in Arovit Petfood, which held shares in thirteen further companies in various European countries.
C&D Foods provides its sub-subsidiary Arovit Petfood with various administrative and IT services which were subject to VAT, such as accounting, controlling and budgeting services.
In 2009, the new proprietor of the Arovit group, a bank, assumed ownership of the Arovit group for the sum of EUR 1, on account of the failure on the part of the former owner of that group to repay a loan which had been granted to it. The intention of the bank was to sell all of the shares owned in the group, so as no longer to be the group’s creditor. It entered into a number of consultancy agreements with auditing companies and a law firm on behalf of C&D Foods, in the context of that proposed sale.
C&D Foods deducted the input tax in respect of the VAT paid to the law firm and the auditing companies on their fees. The Danish VAT authorities denied the deduction of this VAT. As justification, they stated, respectively, that the consultancy services had not been provided to C&D Foods and that the expenditure did not exhibit the necessary relation to C&D Foods’ VAT-taxable output transactions (i.e. services invoiced to Arovit Petfood).
Decision of the Court
Firstly, the Court reminds that VAT on expenditures could be deductible if it there is a direct and immediate link between these expenditures supply of goods or services utilized and a taxable output transaction (or, exceptionally, a taxable input transaction).
The Court adds, as a further requirement, the necessity to determine the “exclusive reason” for the sale of shares.
The Court states that the objective of the disposal of shares at issue was to use the proceeds of that sale to settle the debts owed to the proprietor of the Arovit group. Consequently, the direct and exclusive reason of the transaction does not lie in the taxable economic activity of the company and does not constitute a transaction constituting the direct, permanent and necessary extension of its taxable economic activity (providing services to its sub-subsidiary).
The Court thus decides that the VAT on expenditures in connection with the sale (auditors and lawyers’ fees) is not deductible.
Compared to the recent RyanAir case where the Court accepted the deduction of the VAT incurred on the aborted acquisition of shares in another company, some may find the decision of the Court somehow disappointing and contradictory. There is effectively a difference of treatment between the VAT deduction on costs in relation to the acquisition of shares and those in relation with the sale of shares. More importantly, the concept of “essential reason” might be delicate to interpret and apply in practice and could lead to disputes. More than never, a careful analysis of any transaction including its global economic context is necessary for all taxpayers.