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German Federal Tax Court Rules Input VAT is Non-Deductible On Advisory Services When Selling Shares
The issue regarding the deductibility of VAT relating on expenses incurred by a taxpayer for a sale of shares has for several years resulted in abundant national and European case law. The wealth of case law available on this topic has generally moderated German tax authorities' strict position. The German tax authorities consider that VAT related to expenses incurred for the sale of shares is generally not recoverable since the expenses have a direct and immediate link with a transaction that does not give rise to a VAT collection. However, provided these expenses have a direct link with the whole economic activity of the taxpayer, the expenses incurred by an entity for a sale of its shareholding in a subsidiary may form part of its overhead costs. This in practice permits a total or partial input VAT deduction relating to such expenses. In a recent ruling, dated 27 January 2011, the Federal Tax Court did not follow this approach and denied the input VAT recovery. Taxand Germany reviews the ruling and the impact this will have on multinationals with subsidiaries, in particular holding companies.
In the case at hand an industrial company that was, in principle, pursuing a fully taxable business, i.e. transactions that allow a full input VAT recovery, sold 99 % of the shares in an affiliated company which was actively managed by the seller. In the course of the sale, the company received structuring and legal advice from a lawyer and financial advice from an investment bank. Both consultants charged VAT on their invoices and the tax office refused an input tax deduction in both cases. The seller argued that a deduction of the VAT should be allowed as the disposal of the shares took place in order to gain cash for reinvestment in its core business and, thus, for its economic activities.
Following the ECJ's SKF decision dated 29 October 2009 the Federal Tax Court (BFH) held that the sale of shares in subsidiaries qualifies as an economic activity which is subject to VAT, provided the selling shareholder took an active role in the management of those companies (e.g., providing management, administration and marketing services for a fee on which VAT is charged).
Consequently, in the case at hand the BFH qualified the sale of the shares as a taxable but VAT exempt transaction.
Thus, the BFH denied the input VAT recovery on the basis of the direct and immediate link between the consulting services received and the VAT exempt sale of the shares. The fact that the company used the proceeds from the sale of shares in the affiliated company for its general taxable activities is not sufficient since this was merely an indirect purpose. The BFH stated that in such cases the expenses incurred in connection with the advisory services are basically incorporated in the price of the shares sold. The BFH referred to the ECJ's SKF decision in which the ECJ specified that the jurisdiction has to determine, taking into account all the circumstances in which the transactions in question occur, if the expenses incurred are likely to be incorporated in the price of the shares sold (in which case the deduction of VAT is not permitted) or if they form part of the costs of the transactions that are directly related to the economic activities of the taxpayer (in which case VAT deduction is permitted).
Finally, the BFH stated that the sale of a 99 % holding could not be compared with the non-taxable sale of business (asset sale) as the sale of the business implied the full transfer of ownership rights. Only a full transfer of all the shares could be treated as non-taxable sale of the whole business. However, according to the BFH decision it would be possible to sell the shares if they were held in a fiscal unity subsidiary, provided the purchaser entered the transaction with the firm intention of forming its own fiscal unity with the target.
Input VAT relating to expenses incurred by a taxpayer for a sale of shares generally will not be deductible. This rule is based on the assumption that expenses do not regularly form part of the costs directly related to the economic activities of the taxpayer. However, if 100% of the shares in a subsidiary are to be sold, a non-taxable sale of the whole business will be given. In this situation, the taxpayer is entitled to credit input VAT within the scope of his ordinary business activities.
If less than 100% of the shares are sold as part of a fiscal unity the same applies, provided the purchaser intends to form its own fiscal unity with the target. The seller of the shares would be required to provide evidence for the respective intention of the purchaser.
Alternatively, the seller could opt for VAT liability on the tax exempt sale of shares to achieve full deduction of input VAT on advisory services in connection with the sale of shares.
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