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French perspective on the deductibility of VAT
The European Court of Justice (ECJ) has rendered an eagerly expected position related to the deductibility of VAT paid on on services incurred by a company directly attributable to the disposal of shares. Arsene Taxand, our French member, give give their view on the impact of these changes.In a recent decision dated October 29, 09 (AB SKF C-29/08), the European Court of Justice (ECJ) has rendered an eagerly expected position related to the deductibility of VAT paid on the services supplied for the purposes of a disposal of shares by a company (hereinafter "disposal expenditures").
In this decision, which is not a positive move, the ECJ, based on the tax neutrality principle, has judged that input VAT paid on services supplied for the purposes of a disposal of shares is deductible provided there is a direct and immediate link between the costs associated with the input services and the overall economic activities of the taxpayer, and, as a result, with the general costs of the company.
As a consequence, the position of the ECJ in this case raises a new practical difficulty: the deduction of VAT paid on such services is based on the premiss that the costs incurred to acquire input services are incorporated either in the cost of particular output transactions or in the cost of goods or services supplied by the taxable person as part of his economic activities. The local Courts will have to take account of all the circumstances surrounding the transaction and to determine whether the direct and immediate link exists.
Furthermore, in this decision, the ECJ also specifies that a disposal of shares is a transaction subject to VAT, but covered by the exemption provided for by Article 13 B (d) (5) of the Sixth Directive.
As from this qualification, two practical issues could be contemplated :
- A narrow solution applicable in few situations: VAT paid on services supplied for the purposes of a disposal of shares could be deductible as soon as the disposal of the controlling interests is made to a non-EC resident purchaser. This solution is currently applied in the UK and authorised by the British tax authorities. In France, this solution could be based on Section 271 V of the French tax code (this Section provides for that VAT on banking and financial operations, which have non EC counterparts, is deductible).
- A wider solution: VAT on disposal expenditures could be deductible up to the general VAT deduction proportion. This solution, very useful from a practical standpoint, could be based on Section 206 V of the Appendix II of the French tax code (voluntary application of the general VAT deduction proportion to the whole expenses of the company).
Both solutions could help to secure the deductibility of VAT paid on services supplied for the purposes of a disposal of shares and, in the same time, enable the company to avoid the difficult allocation of input VAT to output operations.
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