The Dutch Supreme Court raised preliminary questions to the European Court of Justice (ECJ) on whether the transfer of 30 percent of the shares held in a company would constitute a transfer of a totality of assets or part thereof. In such event, the costs incurred for services supplied to the seller of the shares in connection with that transaction could be considered part of the general costs associated with its entire economic activity and would therefore be fully deductible. The ECJ ruled otherwise.

According to the ECJ, the transfer of shares in a company cannot, irrespective of the size of the shareholding, be regarded as equivalent to the transfer of a totality of assets or part thereof. This is different if the holding is part of an independent unit which allows an independent economic activity to be carried out, and that activity is carried on by the buyer. The mere disposal of shares, unaccompanied by the transfer of assets, does not allow the buyer to carry on an independent economic activity as the seller’s successor. The ECJ also noted that the disposal to a single person of all the shares in a company by all the shareholders of that company cannot be regarded as equivalent to the transfer of a totality of assets for VAT purposes.

Whether or not there is a right to deduct input VAT in the circumstances at hand, it must be pointed out that there is a right to deduct where the input transactions effected have a direct and immediate link with output transactions giving rise to the right to deduct. If that is not the case, it is necessary to examine whether the costs incurred to acquire the input goods or services are part of the general costs linked to the taxable person’s overall economic activity. In either case, whether there is a direct and immediate link will depend on whether the cost of the input services is 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.

Since the transfer of shares in the case at hand must be categorised as an exempt transaction, a right to deduct will exist only if the cost of the services supplied to the seller in relation to that disposal is part of the general costs relating to its overall economic activity, without being incorporated in the sale price of those shares.