Indirect Tax Alert
VAT on costs related to the (aborted) sale of shares by a related company may be recoverable
Where a business incurs costs that relate to a(n aborted) activity of a related business, the VAT on these costs may be deductible if the proceeds that are (to be) generated by the (planned) transaction are used for funding the taxed business activities of the business incurring the costs. Even though in this case, the CJEU ruled that the VAT was not recoverable, it left the door to VAT recovery that it opened in earlier rulings, ajar.
The C&D Foods case
In the C&D Foods case,1 the CJEU was asked about the VAT recovery of costs incurred by a holding company (C&D Foods Acquisition ApS) that related to the intended (but aborted) sale of shares in one of its sub-subsidiaries (Arovit Petfood), a company for which it performed management and IT services for consideration. The proceeds of this intended sale of shares were to be used to repay a loan from Kaupthing Bank to the Arovit Group2 (of which C&D Foods was a part). At the time of the intended transaction, Kaupthing Bank was the owner of the Arovit Group.
The CJEU holds that in order for a share disposal transaction to be able to come within the scope of VAT, “the direct and exclusive reason for that transaction must, in principle, be the taxable economic activity of the parent company in question, or that transaction must constitute the direct, permanent and necessary extension of that activity”. According to the CJEU, that is the case where that transaction is carried out “with a view of allocating the proceeds of that sale directly to the taxable economic activity of the parent company in question or the economic activity carried out by the group of which it is the parent company”.
In the present case, the CJEU decided that using the proceeds of the planned sale of the shares to settle the debts owed to Kaupthing Bank did not fall within the scope of VAT. However, we can imagine scenarios where the planned proceeds will be used for the taxed economic activity of the business incurring the costs or for the economic activity of the group it owns.
What does this mean for businesses?
The ruling makes clear that VAT on costs incurred for transactions performed by other businesses, or where other businesses also benefit from the purchase of the services, may be deductible if a direct and immediate link exists between the costs and the taxed economic activities of the business incurring the costs. (Holding) companies should try to avoid situations where it can be argued that costs are not incurred in relation to relevant economic, taxable activities but that these costs would be incurred ‘anyway’ (i.e. also if no related economic, taxable activities were performed).
This means that businesses that incur costs in situations similar to the C&D Foods case, should make sure that they can demonstrate that the direct and exclusive reason for that transaction must, in principle, be the taxable economic activity of the parent company in question, or that transaction must constitute the direct, permanent and necessary extension of that activity.
We’d be happy to discuss with you how you could achieve this or how this ruling may affect the VAT position of your business. Please contact your local EY VAT adviser or any of the people mentioned in this Indirect Tax Alert if you think this ruling may be relevant for you.
 CJEU case C-502/17, C&D Foods Acquisition ApS v Skatteministeriet, ECLI:EU:C:2018:888.
 If is unclear to which entity within the Arovit Group the loan was actually provided, but the bank intended to sell Arovit Petfood so as no longer to be the group’s creditor. It is irrelevant for the outcome of the case.
The above is based on our interpretation of current tax legislation and case law published to date. This Indirect Tax Alert provides general information with no pretence of completeness, and it is not a tax advice.
For more detailed information about the matters discussed in this Alert, please contact one of EY’s tax advisers listed below.
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Walter de Wit
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e-mail: Walter de Wit
Remco van der Zwan
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e-mail: Remco van der Zwan