In a ruling issued on November 8th 2018 (C-502/17), the ECJ clarified the conditions for input VAT deduction on expenses incurred in the context of share disposal transactions.
The plaintiff, C&D Foods Acquisition ApS (the “Parent”), a Danish company, was the parent of Arovit Holding A/S, which, in turn, held all shares of Arovit Petfood. The Parent had entered into an agreement with its sub-subsidiary Arovit Petfood for management and IT services. In 2008, the ownership of the Arovit group fell into the hands of a bank (as a result of a loan default by the former owner). The bank sought to sell all the shares of Arovit Petfood and, in that context, the Parent entered into various consultancy agreements. With no potential buyer by the end of 2009, the sale process was closed. The Parent nevertheless deducted the input VAT on the consultancy services, which was denied by the Danish VAT authorities.
The ECJ had to respond to the questions, referred to it by the High Court of Western Denmark, whether (i) a failed share disposal, falls within the scope of the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (the “VAT Directive”) and (ii) if so, whether the VAT Directive grants the right to deduct input VAT on expenditures incurred in the context of the disposal of shares in a sub-subsidiary to which the selling company provided VAT taxable management services.
The ECJ first recalled that only payments which are consideration for a transaction/ economic activity come within the scope of VAT; such is not the case for payments arising from the ownership of an asset (such as dividends or other income derived from shareholding). This analysis does not apply when the holding is accompanied by a direct/indirect involvement in the management of a company, insofar as that involvement entails carrying out transactions which are subject to VAT.
The ECJ further referred to case law, according to which a share disposal, implemented to enable a parent company to restructure a group, could be regarded as a transaction that consisted in obtaining income on a continuing basis from activities which went beyond a simple share sale.
In conclusion, the reason for the transaction must be a decisive criterion: in order for a share disposal to be able to fall within the scope of VAT, the direct and exclusive reason for that transaction must be the taxable economic activity of the shareholder, or that transaction must constitute the direct, permanent and necessary extension of that activity. The latter is the case where the share disposal is carried out with a view to allocating the sale proceeds directly to the taxable activity of the seller or to the economic activity carried out by the group of which it is the parent company. As, in the case at hand, the proceeds of the sale of shares of Arovit Petfood were to be used to settle the bank debt of the group, the sale did not – according to the ECJ – fall within the scope of VAT, so that the input VAT incurred on consultancy services was not deductible.