VAT on costs directly and immediately linked to the intention to sell shares is non-deductible

In brief

The Court of Justice of the European Union (the “Court”) recently issued the Advocate General’s opinion in case C-502/17 C&D Foods Acquisition ApS. The opinion states that VAT on costs directly and immediately linked to the intention to sell shares is non-deductible.

In detail

Danish company C&D Foods Acquisition ApS (hereinafter “the Company”) intended to sell the shares it held indirectly in its sub-subsidiary, to which it provided taxable management services. To assist the sale of those shares, the Company acquired various services, for which it deducted input VAT. In the absence of potential buyers, the Company eventually cancelled efforts to sell those shares and the Danish tax authorities rejected the Company’s right to deduct VAT on the acquired services.

The Advocate General concluded the following:

  • Preparatory acts for starting an economic activity and acts for ending that economic activity are both part of that economic activity. As such, if a holding company no longer carries on the economic activity conducted prior to the sale of shares held indirectly in its sub-subsidiary (i.e. the supply of management services to that sub-subsidiary), as a result of the sale of those shares, that sale of shares represents an economic activity;
  • VAT on costs incurred by a holding company in selling its shares held indirectly in a sub-subsidiary is non-deductible, if there is a direct and immediate link between those costs and the intention to sell those shares (i.e. a VAT exempt without credit transaction), even if the holding company supplies taxable services to its sub-subsidiary;
  • VAT on such costs may be deductible, only if there is no direct and immediate link between those costs and the intention to sell the shares, namely if there is a link between those costs and the entire economic activity of the holding company (which also includes taxable activities).
[Source: Advocate General's Opinion in case C-502/17 C&D Foods Acquisition ApS against Skatteministeriet - Expenditure incurred for services purchased in connection with the planned transfer of shares in a subsidiary, published on Curia.europa.eu website, on 6 September 2018]

The takeaway

This opinion points out that taxable persons are not entitled to deduct VAT on purchases of services necessary for the sale of shares, if there is a direct and immediate link between those costs and the intention to sell the shares.

If the Court follows the Advocate General's opinion, it could be extended to cover all cases involving an intention to sell shares, as far as the deduction of input VAT on associated costs is concerned.

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