Flashback on ECJ Cases – C-29/08 (SKF) – VAT deduction related to disposal of shares if there is a direct and immediate link with the overall economic activities

On October 29, 2009, the ECJ issued its decision in the case C-29/08 (SKF).

Context: Sixth VAT Directive – Articles 2, 4, 13B(d)(5) and 17 – Directive 2006/112/EC – Articles 2, 9, 135(1)(f) and 168 – Disposal by a parent company of a subsidiary and of its holding in a controlled company – Scope of VAT – Exemption – Supplies of services acquired as part of share disposal transactions – Deductibility of VAT

Article in the EU VAT Directive

Article 2, 9, 135(1)(f) and 168 in the EU VAT Directive

Article 135 (Eemption)
1. Member States shall exempt the following transactions:
(f) transactions, including negotiation but not management or safekeeping, in shares, interests in companies or associations, debentures and other securities, but excluding documents establishing title to goods, and the rights or securities referred to in Article 15(2);

Article 168 (Origin and Scope of Right of Deduction)
In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;
(b) the VAT due in respect of transactions treated as supplies of goods or services pursuant to Article 18 (a)and Article 27;
(c) the VAT due in respect of intra-Community acquisitions of goods pursuant to Article 2(1)(b)(i);
(d) the VAT due on transactions treated as intra-Community acquisitions in accordance with Articles 21 and 22;
(e) the VAT due or paid in respect of the importation of goods into that Member State.

Facts

The share company SKF is the parent company of an industrial group which carries on activities in a number of countries. It plays an active role in the management of its subsidiaries and supplies to them, for consideration, services, including management, administration and marketing policy. Those services are invoiced to the subsidiaries and SKF is liable for VAT on them.
SKF intends to restructure its group and, in that connection, to dispose of the business of one of its wholly-owned subsidiaries (‘the subsidiary’) by transferring all the shares in the latter. In addition, SKF intends to dispose of its 26.5% shareholding in another company, which was in the past wholly owned (‘the controlled company’) and to which SKF supplied, as the parent company, services which were subject to VAT. The reason for those disposals is to obtain funds to finance other activities of the group. In order to carry out those disposals, SKF proposes to acquire supplies of services in the area of valuation of shares, assistance with negotiations and specialised legal advice for the drafting of the contracts. Those supplies of services will be subject to VAT.
In order to obtain clarification on the tax consequences of those disposals, SKF applied to the Skatterättsnämnden for a preliminary decision on the right to deduct input VAT paid on the supplies of services acquired as part of the disposal of shares in the subsidiary and the controlled company.
In its preliminary decision of 12 January 2007, the Skatterättsnämnden held that, in both cases, SKF was entitled to deduct the input VAT paid on those supplies of services. It took the view that the supplies of services provided by SKF to the subsidiary and to the controlled company were part of an economic activity and that the VAT paid on the costs which SKF had incurred when those companies were acquired was deductible. In the same way, the VAT paid on costs when that activity was brought to an end ought also to be deductible. The fact that that activity was, for the benefit of the controlled company, to be brought to an end gradually did not affect that assessment.
The Skatteverket appealed against that decision to the referring court, claiming that the VAT paid on the supplies of the services acquired was not deductible. SKF, for its part, contended that the preliminary decision of the Skatterättsnämnden should be upheld.

Questions

(1) Are Articles 2 and 4 of the Sixth Directive … and Articles 2 and 9 of Directive 2006/112 … to be interpreted as meaning that, where a taxable person liable for [VAT] on supplies of services to a subsidiary disposes of shares in that subsidiary, that disposal is a transaction subject to [VAT]?

(2) If the answer to the first question is that the disposal constitutes a taxable transaction, is it then covered by the exemption provided for by Article 13B(d)(5) of the [Sixth] Directive … and Article 135(1)(f) of Council Directive 2006/112 in respect of transactions in shares?

(3) Irrespective of the answer to the above two questions, can there be a right to deduct for expenditure directly attributable to the disposal transaction, in the same way as there is for general costs?

(4) Is it of significance for the answers to the above questions if the disposal of interests in a subsidiary takes place in stages

AG Opinion

(1) Articles 2(1) and 4(1) and (2) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended, latterly, by Council Directive 2006/18/EC of 14 February 2006, and Articles 2(1) and 9(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, must be interpreted to mean that the disposal of the totality of shares which a parent company holds in the share capital of a subsidiary and in that of a controlled company, in the management of which companies that parent company has directly or indirectly taken part, by providing to them for consideration various supplies of services of an administrative, accounting and commercial nature for which that parent company is liable for value added tax, constitutes an economic activity.

(2) A disposal of shares in a subsidiary and in a controlled company, such as that at issue in the main proceedings, is a transaction covered by the exemption provided for by Article 13B(d)(5) of Sixth Directive 77/388, as amended by Directive 2006/18, and by Article 135(1)(f) of Directive 2006/112.

(3) A taxable person who has acquired supplies of services in order to carry out a disposal of shares in a subsidiary and in a controlled company, a transaction which is covered by the exemption provided for by Article 13B(d)(5) of Sixth Directive 77/388, as amended by Directive 2006/18, and by Article 135(1)(f) of Directive 2006/112, and with which those services have a direct and immediate link, does not have the right to deduct input value added tax on those services, even when the disposal of shares is a transaction which contributes to the objective of restructuring the taxable person’s industrial activities.

(4) The answers to the first three questions are not affected by the fact that the disposal of shares in the subsidiary and/or the controlled company is carried out in several successive transactions.

Decision

1. Articles 2(1) and 4(1) and (2) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, and Articles 2(1) and 9(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that, where a parent company disposes of all the shares in a wholly-owned subsidiary and of its remaining shareholding in a controlled company which was previously wholly owned by it, and where it has supplied to those companies services that are subject to value added tax, that disposal is an economic activity coming within the scope of those directives. However, in so far as the disposal of shares is equivalent to the transfer of a totality of assets or part thereof of an undertaking, within the meaning of Article 5(8) of Sixth Directive 77/388, as amended by Directive 95/7, or the first paragraph of Article 19 of Directive 2006/112, and where the Member State concerned has chosen to exercise the option provided for by those provisions, that transaction does not constitute an economic activity subject to value added tax.

2. A disposal of shares such as that at issue in the main proceedings must be exempted from value added tax pursuant to both Article 13B(d)(5) of Sixth Directive 77/388, as amended by Directive 95/7, and Article 135(1)(f) of Directive 2006/112.

3. There is a right to deduct input value added tax paid on services supplied for the purposes of a disposal of shares, under Article 17(1) and (2) of Sixth Directive 77/338, as amended by Directive 95/7, and Article 168 of Directive 2006/112, if there is a direct and immediate link between the costs associated with the input services and the overall economic activities of the taxable person. It is for the referring court to take account of all the circumstances surrounding the transactions at issue in the main proceedings and to determine whether the costs incurred are likely to be incorporated in the price of the shares sold or whether they are among only the cost components of transactions within the scope of the taxable person’s economic activities.

4. The answers to the preceding questions are not affected by the fact that the disposal of shares is carried out by way of several successive transactions.

Summary

Transfer of Subsidiary and Participation in Associated Company – Services involved for the purpose of transfer of shares

The transfer by a parent company of all shares in a wholly-owned subsidiary and of its shareholding in an associated company that was previously a wholly-owned subsidiary, for which it provided services subject to VAT, is an economic activity. However, to the extent that the transfer of shares can be equated with the transfer of all or part of a generality of an undertaking and provided that the Member State concerned has made use of the option offered by those provisions, that transaction does not constitute an economic activity subject to VAT .

A transfer of shares such as that at issue in the main proceedings should be exempt from VAT.

The right to deduct input tax on the services used for the purpose of a share transfer arises when there is a direct and immediate link between the expenditure on the services at an earlier stage and the economic activities of the taxable person as a whole. It is for the referring court to determine, taking into account all the circumstances in which the acts at issue in the main proceedings took place, whether the expenses incurred can be included in the price of the shares sold or whether they form only part of the components of the the price of transactions that form part of the economic activities of the taxable person.

The answer to the previous questions is not affected by the fact that the share transfer takes place through several successive actions.

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