Judgment of the European Court of Justice (ECJ) on 8 November 2018 in Case C‑502/17 (C&D Foods Acquisition ApS) regarding the deduction of input VAT for holding companies relating to sales of shares
The Danish company C&D Foods is part of the international group Arovit. It held 100% of the shares in Arovit Holding, which in turn held all the shares in Arovit Petfood. A further 13 companies based in various European countries belong to the group and the shares are held by Arovit Petfood.
C&D Foods carried out various management and IT services subject to VAT on behalf of its granddaughter, Arovit Petfood, on the basis of a management agreement, including accounting, creditors’ and accounts receivable administration and budgeting. As compensation, C&D Foods received an amount that corresponded to the wage costs, plus a profit margin of 10% and the Danish VAT at the rate of 25%. As far as the other companies of the group are concerned, the role of C&D Foods remained limited to owning the shares in these companies.
In 2009, the Icelandic financial institution Kaupthing Bank acquired the Arovit group, which was in economic difficulties. Kaupthing Bank instructed several accountancy firms and the law firm Holst Advokater to investigate the extent to which a restructuring of the Arovit group was possible. In this context, Kaupthing Bank concluded consultancy agreements with the advisers involved, whose fees, plus VAT, were paid by C&D Foods.
The law firm also drafted at least one draft agreement for C&D Foods for the sale of C&D Foods’ shares in Arovit Holding and Arovit Petfood to a buyer not named at that time. For that consultancy work, the law firm invoiced C&D Foods the corresponding fee plus VAT. However, the intention to sell the shares was abandoned in autumn 2009 because no buyer could be found.
C&D Foods requested that the VAT paid to the law firm and the accountancy firms be deducted. Both the Danish Customs and Tax Authority and, after administrative appeal had been lodged, the Landsskatteret (highest administrative authority for tax matters, Denmark), however, refused the deduction of VAT. They argued that the consultancy services had not been carried out for the benefit of C&D Foods and furthermore that for the expenditure the requirement that they were related to the taxed C&D Foods transactions at a later stage was not met.
The ECJ has been asked the following questions:
(1) Is a holding company entitled to the full deduction of VAT on the costs of services at an earlier stage related to due diligence-examinations carried out in anticipation of an intended, but unrealized, sale of shares in a subsidiary for which the holding carries out management and IT services in the field of management and IT?
(2) Is it important that the price for the management and IT services provided by the holding company in the course of its economic activities is a fixed amount corresponding to the wage costs of the holding company plus a profit margin of 10%?
(3) Regardless of how the foregoing question is answered: can there be a right to deduct input tax on the consultancy costs at issue in the main proceedings as general costs and, if so, under what conditions?
Jugdment (unofficial translation):
The ECJ decided that:
Council Directive 2006/112 / EC must be interpreted as meaning that a planned but unrealized sale of shares which does not find its exclusive cause directly in the taxable economic activity of the company concerned or which does not constitute the direct, permanent and necessary extension of this economic activity, does not fall within the scope of the value added tax.