AG Kokott: VAT recovery limitation on transaction costs may also be applicable to aborted share disposal

7 September 2018

On September 6, 2018, the Advocate-General Kokott (the “AG”) of the Court of Justice of the European Union (the “CJEU”) delivered her opinion in the Danish case of C&D Foods Acquisition (C-502/17). In her opinion, the AG indicates that an aborted sale of shares may result in a VAT recovery limitation in relation to the VAT on costs that are directly linked to this contemplated transaction.

C&D Foods is a holding entity that renders a variety of VAT taxable (management) services towards its indirect subsidiary. C&D Foods aimed to dispose the shares in its subsidiary. Regarding the contemplated transaction several costs are incurred by C&D Foods as the recipient of consultancy services. The contemplated transaction has however been aborted. The main question is whether the VAT on the transaction costs incurred is recoverable by C&D Foods.

Due to the fact that C&D Foods performs economic activities against remuneration towards an indirect subsidiary, the AG concluded that the contemplated disposal of shares – in this case – should be considered as an economic activity. As a result, the AG considers the contemplated transaction to be a VAT exempt sale of shares.

The AG argues that the CJEU has previously judged that in this respect it should be tested whether the costs incurred are incorporated in the price of the shares. She mentions that in her view this should be interpreted in such way that the expenses should have a direct impact on the profit obtained from a share transfer. In this respect she explains that the costs should be closely connected to the share transfer in such way that they – from an economic point of view – are a direct element of costs of the (contemplated) share transfer. The fact that the share deal has been aborted does in her view not automatically mean that there is not a direct link with a VAT exempt activity. The AG finds indications that the consultancy services are directly linked to a contemplated VAT exempt activity and hence the VAT would not be recoverable. Whether this is indeed the case should be assessed by the referring court. In case the costs are not considered to be directly linked to a contemplated VAT exempt activity, the costs could in the AG’s view possibly qualify as general costs and VAT may be (partly) recoverable.

We have to wait and see whether the CJEU will follow the AG’s opinion in its judgment. However, the outcome of this case may impact the Dutch M&A market as these type of transaction costs are often treated as general costs and VAT may have been (partly) reclaimed accordingly. We recommend businesses that have the intention to dispose (a part of) their businesses via a share deal to analyze their position upfront in order to reclaim the VAT on the transactions costs.

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