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05 Oct 2018

VAT Treatment of a Redemption of Shares in Kind

On June 13th 2018, the European Court of Justice (the “ECJ”) handed down a ruling (Case C-421/17) on the VAT treatment of the transfer, by a limited company, to one of its shareholders, of the ownership of immovable property, as consideration for the redemption of shares.

The facts of the case involved a Polish limited company, active in the pharmaceutical business, which carried out a restructuring of its share capital through the redemption of shares held by its shareholder. The consideration due to the shareholder consisted in the transfer, in kind, of ownership of a plot of land, as well as the buildings and equipment erected thereon. The ECJ held that said transfer constituted a supply of goods for consideration, falling within the scope of VAT, provided that the assets transferred to the shareholder had been allocated to the company’s economic activity.

To reach its conclusion, the ECJ recalled the scope of VAT, set out in Article 2 of Council Directive 2006/112/EC of November 28th 2006 on the common system of value added tax and encompassing the (i) supply of goods (ii) for consideration (iii) within the territory of a Member State (iv) by taxable person (v) acting as such.

In the case at hand, it was unquestionable that the transaction led to the transfer of the right of ownership of immovable property (i.e. to a supply of goods) and was carried out by a VAT taxable person (i.e. a manufacturer of pharmaceutical products) within the territory of a Member State (i.e. Poland).

With regards to the consideration for the supply, the ECJ ruled that there was, between the supplier of the immovable property and the beneficiary thereof, a legal relationship in which the company transferred ownership of immovable property to its shareholder in exchange for the shares held by the latter. There was thus reciprocal performance, the one being the consideration for the other.

Finally, the ECJ considered that the final requirement of a taxable supply of goods, namely the context of the supply, was potentially met. Although a VAT taxable person is deemed to act as such, in principle, only if he does so as part of his economic activity, the latter concept is to be understood in a broad sense. Therefore the ECJ concluded that, should it transpire that the goods, whose ownership was transferred by the company to its shareholder in return for the redemption of its own shares, were allocated to the company’s economic activity in the broad sense (which was for the referring court to ascertain), the transaction would be subject to VAT.