VAT on costs incurred in connection with an envisaged share disposal is in principle not recoverable. However, if the reason for the disposal lies in the VAT taxed activities of the parent company, VAT on the disposal costs may be recoverable. Proper and timely documentation of such reasons will play a deciding role. This follows from the judgment of the Court of Justice of the European Union (“CJEU”) in the C&D Foods case (C-502/17) on 8 November 2018.
Facts of the case
C&D Foods’ activities consisted of (i) the holding of shares in a subsidiary and (ii) the provision of VAT taxed services to the sub-subsidiary held by aforementioned subsidiary. To satisfy the debt it owed to its ultimate shareholder, C&D Foods intended to sell and transfer the subsidiary and incurred costs in that respect. The transaction never materialized as no buyer was found. C&D Foods sought to recover VAT on the costs incurred, arguing that these were incurred within the context of its economic activities – the provision of VAT taxed services to the sub-subsidiary.
Judgment
The CJEU considered that a disposal of shares – in and by itself – in principle does not allow recovery of VAT on costs incurred in connection therewith, as such disposal is not a VAT taxed activity. The CJEU further considered this could be different if (i) the direct and exclusive reason for the disposal of shares lies in the VAT taxed activities of the parent company, or (ii) that disposal constitutes the direct, permanent and necessary extension of the VAT taxed activities of the parent company. According to the CJEU, that is the case where that disposal is carried out with a view to allocating the proceeds directly to the VAT taxed activities of the parent company in question or to the VAT taxed activities carried out by the group of which it is the parent company. Since this was clearly not the case with C&D Foods – it sought to satisfy the debt it owed to its ultimate shareholder – VAT on the costs incurred was not recoverable.
Implications
The recovery of VAT on costs incurred in connection with disposals of shares is often a topic of discussion with the European tax authorities. The C&D Foods case could provide strong arguments to claim recovery of VAT on costs related to share disposals within the framework of – for example – corporate restructurings and potentially also termination of activities. Accurate and timely documentation of the reasons for a share disposal, as well as the envisaged use of proceeds from such disposal will be of great importance in this respect.
