Briefing document & Podcast: ECJ VAT C-29/08: TOGC, Share Disposal and Deductibility of Input Tax

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Detailed Briefing Doc: VAT Principles in Share Disposal Transactions

I. Executive Summary

This briefing document outlines key Value Added Tax (VAT) principles concerning share disposal transactions by parent companies, particularly focusing on when such disposals constitute an “economic activity,” their VAT exemption status, and the deductibility of input VAT on related services. The core insights are derived from the European Court of Justice (ECJ) judgment in Skatteverket v AB SKF (Case C‑29/08) and summarized in the “VAT Principles in Share Disposal Transactions” excerpts.

The main takeaway is that while the mere holding and sale of shares are generally not economic activities, a parent company actively managing its subsidiaries (providing VAT-taxable services) will find its share disposals classified as an economic activity, thus falling within the scope of VAT. Such disposals are, however, generally exempt from VAT. Crucially, the right to deduct input VAT on services acquired for these disposals hinges on whether the costs are directly linked to the overall economic activities of the taxable person (as general overhead) rather than solely to the specific (exempted) disposal. The principles of fiscal neutrality and legal certainty are paramount in applying these rules, meaning similar transactions should be treated consistently, regardless of whether they occur in stages.

II. Main Themes and Most Important Ideas/Facts

1. Defining “Economic Activity” in Share Disposals

General Rule: The “mere acquisition, holding, and sale of shares” do not, in themselves, constitute “economic activities” subject to VAT. As stated in Skatteverket v AB SKF, such transactions “cannot amount to exploitation of an asset intended to produce revenue on a continuing basis, as the only consideration for those transactions consists of a possible profit on the sale of those shares.”
Exception (Parent Company Involvement): A parent company’s disposal of shares does qualify as an “economic activity” if the parent company had “direct or indirect involvement in the management of the company in which the holding has been acquired,” for example, by “supplying to them, for consideration, a variety of administrative, accounting and marketing services, in respect of which it was liable to pay VAT.”
This involvement transforms the disposal into a “direct, permanent and necessary extension of the taxable activity” of the parent company, especially when carried out for group restructuring or to obtain income on a continuing basis. The Skatteverket v AB SKF judgment highlights that the disposal by SKF “carried out in order to enable the parent company to restructure a group of companies, can be regarded as a transaction that consists in obtaining income on a continuing basis from activities which go beyond the compass of the simple sale of shares.”
Consistency Principle: This classification ensures “equal treatment and tax neutrality,” extending the economic nature recognized for the acquisition of holdings with management involvement to their subsequent disposals.

2. VAT Exemption for Share Disposal Transactions

General Exemption: When a share disposal is deemed an economic activity within the scope of VAT, it is “generally exempt from VAT.”
This exemption is mandated by “Article 13B(d)(5) of the Sixth VAT Directive and Article 135(1)(f) of Directive 2006/112.”
Broad Interpretation: The term “transactions in shares” for exemption purposes is interpreted “broadly enough not to be restricted to the business of trading in shares.”
The key is that the transaction “alter[s] the legal and financial situation as between the parties,” which a sale of shares inherently does.
Principle of Objective Character: The interpretation “would restrict the exemption in question in a manner which is not justified by the relevant wording,” and a narrow interpretation “would be contrary to the VAT system’s objectives of ensuring legal certainty and facilitating application of the tax by having regard, save in exceptional cases, to the objective character of the transaction in question.”

3. Circumstances Where Share Disposals Might Not Be Subject to VAT (Out of Scope)

Transfer of a Totality of Assets: A significant exception occurs if the “disposal of shares is equivalent to the transfer of a totality of assets or part thereof of an undertaking.”
Member State Option: If the “Member State concerned has chosen to exercise the option provided for by Article 5(8) of the Sixth Directive or the first paragraph of Article 19 of Directive 2006/112,” then “that transaction does not constitute an economic activity subject to VAT.” In such cases, the transfer is not considered a supply of goods for VAT purposes.

4. Deductibility of Input VAT on Related Services

General Rule for Deduction: A parent company can deduct input VAT paid on services (e.g., valuation, negotiation assistance, legal advice) acquired for a share disposal transaction.
“Direct and Immediate Link” Test: The right to deduct depends on a “direct and immediate link between the costs associated with the input services and the overall economic activities of the taxable person.”
Specific Link (Generally No Deduction): If the costs are “directly attributable to the specific (but exempted) share disposal transaction itself,” deduction is generally not allowed. The principle is that “where goods or services acquired by a taxable person are used for purposes of transactions that are exempt or do not fall within the scope of VAT, no output tax can be collected or input tax deducted.”
General Costs (Deductible): However, if the costs are “part of his general costs and are, as such, components of the price of the goods or services which he supplies,” they do have “a direct and immediate link with the taxable person’s economic activity as a whole,” and input VAT is deductible.
National Court’s Role: 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.”

5. Principle of Fiscal Neutrality in Deductibility

Consistent Treatment: The “principle of fiscal neutrality,” a fundamental principle of VAT, “precludes treating similar supplies of services, which are thus in competition with each other, differently for VAT purposes.”
Application to Share Disposals: If consulting costs for share disposals are deductible as “general costs” when the disposal is outside the scope of VAT, then the “same tax treatment must be allowed if the disposal is classified as an exempted transaction.”
Avoidance of Burden: “Any other interpretation would burden the trader with the cost of VAT in the course of his economic activity without giving him the possibility of deducting it.”

6. Impact of Staged Disposals

No Impact: The tax treatment of a share disposal “is not affected by the fact that the disposal of shares is carried out by way of several successive transactions.”
Objective Characteristics: The VAT implications are determined by “the objective characteristics of the transaction at issue,” not by the number of stages.
Legal Certainty: This ensures consistency and aligns with the principle of legal certainty, requiring that “Community legislation must be certain and its application foreseeable by those subject to it.”

III. Conclusion

The ECJ’s ruling in Skatteverket v AB SKF clarifies crucial VAT implications for parent companies involved in share disposals. While a parent company’s active management of subsidiaries brings share disposals into the VAT sphere as an “economic activity,” these transactions are typically exempt. The critical determination for input VAT deductibility hinges on the “direct and immediate link” test, differentiating between costs directly tied to the specific exempted disposal (non-deductible) and those forming part of the company’s general overhead (deductible). The overarching principles of fiscal neutrality and legal certainty ensure that economically similar transactions are treated consistently, regardless of their specific classification (exempt vs. out of scope) or the number of stages involved. National courts bear the responsibility of applying these nuanced principles to the factual specifics of each case.

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