Flashback on ECJ Cases C-435/05 (Investrand) – No deduction of VAT if a transaction has not been performed for the purposes of the taxable activities

On February 6, 2007, the ECJ issued its decision in the case C-435/05 ( Investrand).

Context: (Sixth VAT Directive – Article 17(2) – Right to deduct – Costs related to advisory services obtained in the course of arbitration proceedings to establish the amount of a claim that forms part of a company’s assets, but arose before its holder became liable to VAT

Article in the EU VAT Directive

Article 17(2) of the Sixth VAT Directive (Article 168 of the EU VAT Directive 2006/112/EC).

Article 168
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

Investrand was incorporated on 22 August 1986. It owned 43.57% of the shares in Cofex BV (‘Cofex’), a clothing business.
On 3 August 1989, Investrand sold its Cofex shares to Hi-Tec Sports plc (‘Hi-Tec Sports’). At the time of that sale, it was agreed that it would receive, in addition to a fixed sum, a further sum the amount of which would depend on the profits made by Cofex in the period from 1989 to 1992.
Until 1 January 1993, Investrand’s activity was that of a passive holding company, holding shares in other companies, but with no involvement in their management.
Prior to 1 January 1993, Investrand did not perform any services for consideration. As from that date, under an agreement made with Cofex, it carried out, for consideration, management activities for Cofex.
A dispute arose between Investrand and Hi-Tech Sports over the calculation of the sum payable to Investrand on the basis of Cofex’s profits relating to the 1992 financial year. That dispute gave rise, in 1996, to arbitration proceedings in the course of which the costs related to legal advisory services were invoiced to Investrand.
Investrand deducted the VAT paid on those costs, in the amount of NLG 8 495.50, in respect of the 1996 financial year.
As they took the view that Investrand was not entitled to make that deduction, the Netherlands tax authorities issued an additional assessment. Following an objection by Investrand, the authorities took a decision confirming that additional assessment.
Investrand appealed against that decision before the Gerechtshof te Amsterdam. That court held that Investrand was not entitled to deduct the VAT paid on the costs in question, on the ground that the advisory services had been provided in connection with an activity which it did not at that time perform as a trader and that they did not have a direct and immediate link with an activity carried out in that capacity.
Investrand appealed in cassation against the judgment of the Gerechtshof te Amsterdam before the Hoge Raad der Nederlanden.
The first ground of that appeal seeks to contest the finding of the Gerechtshof te Amsterdam that the sale of shares is not an economic activity within the meaning of the Sixth Directive. The national court is, however, of the opinion that that ground of appeal cannot be accepted as such a finding is consistent with the Court’s case-law (Case C-77/01 EDM [2004] ECR I-4295, and Case C-465/03 Kretztechnik [2005] ECR I-4357).
By the second ground of appeal, Investrand submits that, by linking the costs related to the advisory services which it obtained in 1996 not to the activities carried out by it, as a trader, in the course of that financial year, but to the period when the sale of shares took place, at which time it did not yet have that status, the Gerechtshof te Amsterdam incorrectly interpreted the judgment of the Court in Case C‑98/98 Midland Bank [2000] ECR I-4177.
In that regard, the national court observes that, according to the settled case-law of the Court, a taxable person whose activities are subject to VAT is, under Article 17(2) of the Sixth Directive, entitled to deduct that VAT where there is a direct and immediate link between the goods and services utilised, on the one hand, and, on the other hand, the transactions to be performed by him in respect of which a right of deduction exists.
The national court asks whether such a link can be assumed where a taxable person obtains services with a view to establishing the amount of a claim that forms part of the assets of his business but arose in a period prior to his becoming liable to VAT.
According to that court, the fact that, in the present case, the costs incurred relate to a transaction carried out in a period in which Investrand did not have the status of a taxable person within the meaning of the Sixth Directive precludes there being a direct and immediate link with its business activity, and, therefore, militates in favour of refusing the right to deduct. On the other hand, the fact that the claim corresponding to the sum payable to Investrand forms part of the assets of that company and that, in order to secure those assets, it incurred costs payable out of them could lead to those costs being regarded as forming part of the applicant’s general costs and, consequently, having a direct and immediate link with the activity carried out so as to warrant a right to deduct.

Questions

In the context of the right of deduction granted in Article 17(2) of the Sixth Directive, must it be held that there is a direct and immediate link between specific services obtained by a taxable person and taxable transactions yet to be performed by that same taxable person in a case where those services have been obtained with a view to establishing a monetary claim that forms part of his assets but which arose in a period preceding that in which he became a taxable person for VAT purposes?

AG Opinion

None

Decision

Article 17(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, is to be interpreted as meaning that the costs for advisory services which a taxable person obtains with a view to establishing the amount of a claim forming part of his company’s assets and relating to a sale of shares prior to his becoming liable to VAT do not, in the absence of evidence establishing that the exclusive reason for those services is to be found in the economic activity, within the meaning of that directive, carried out by the taxable person, have a direct and immediate link with that activity and, consequently, do not give rise to a right to deduct the VAT charged on them.

Summary

Costs of consultancy services in arbitration proceedings for the determination of the amount of the claim, before the creditor was liable for tax

Article 17(2) of the Sixth Directive must be interpreted as meaning that the costs of consultancy services purchased by a taxable person for the purpose of determining the amount of a claim forming part of the assets of his undertaking and relating to a sale of shares before the date on which he became a taxable person for VAT purposes, in the absence of information demonstrating that those services are caused solely by the economic activity carried out by the taxable person within the meaning of this Directive, are not directly and directly related to this activity and therefore do not give rise to a right to deduct the VAT charged thereon.

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