In a recent ruling dated 27 January 2011 (V R 38/09), the Federal Fiscal Court (Bundesfinanzhof, BFH) further developed the principles of the European Court of Justice’s (ECJ) SKF decision (C-29/08, cf. Tax Info No. 10, April 2010) and decided that there is no entitlement to a deduction of input value added tax (VAT) paid on advisory fees incurred as part of a share disposal transaction. The decision of the BFH is of high relevance with respect to advisory services in the context of share deals. The ruling was based on the following (simplified) facts of the case:

The plaintiff is the parent company of an industrial group and acquired certain legal and investment banking advisory services which were subject to VAT as part of the disposal of a 99% participation (share deal) in a controlled company (A-AG). The plaintiff deducted the input VAT from the advisory services. The German tax authorities denied the deduction of input VAT as the advisory services acquired by the plaintiff were used for a transaction for purposes of a tax exempt share deal.  

The BFH shares the view of the German tax authorities that no input VAT can be deducted from the acquired advisory services.

At first, the Federal Fiscal Court finds that the share deal is a transaction which is subject to VAT. Generally, the mere acquisition, holding and sale of shares do not constitute an economic activity in the meaning of the Value Added Tax Act (VATA). However, the position is different where the activities are not limited to the mere holding of a controlled company but rather are accompanied by an involvement in the management of the controlled company. Further, the disposal of the 99% participation in A-AG does not qualify as a transfer of a going concern (Sec. 1 (1a) VATA) which would not constitute an economic activity subject to VAT. That would only be the case, if  

  1. all shares, i.e. 100%, in the respective company would be disposed of, or  
  2. the transferred company is a controlled company within a VAT group (Sec. 2 (2) No. 2 VATA) and the acquirer of such company intends to establish a VAT group with the transferred company as a controlled company.  

In the case at hand, none of the requirements outlined above were satisfied, as only 99% of the shares in A-AG were transferred and no circumstances indicated that the acquirer of A-AG intended to establish a VAT group with such company.  

According to the BFH, the deduction of input VAT for the advisory services was excluded as the share deal was VAT exempt pursuant to Sec. 4 No. 8 lit. e VATA. In determining the entitlement to deduct input VAT, it is essential that there is a direct and immediate link between the particular input transaction and a certain output transaction giving rise to the entitlement to deduct VAT. In the absence of any direct and immediate link between the input and the output transaction, the input transaction is linked to the taxable person’s economic activity as a whole and the entitlement to deduct input VAT is determined on grounds of such economic activity as a whole. In the case at hand, the BFH held that the advisory services were directly and immediately linked to the tax exempt share transfer and therefore would not entitle to deduct input VAT (Sec. 15 (2) No. 1 VATA).  

Based on the principles developed by the ECJ and the BFH, the deduction of input VAT in the context of share deals is not entirely excluded:

Under certain circumstances, input VAT may be deducted, provided that the share transfer is regarded as a transfer of a going concern. In such context it is noteworthy that, according to the BFH, a share transfer also qualifies as a transfer of a going concern if the acquirer intends to establish a VAT group with the target company in the course of the transaction (see above). This requires, inter alia, the transfer of a majority shareholding in the target group to allow the financial integration of the target company. If the requirements for a transfer of a going concern are satisfied, the entitlement to deduct input VAT from the acquired advisory services is determined on the seller’s economic activity as a whole.  

Further, input VAT may be deducted in accordance with the economic activity as a whole if the advisory services are part of the general costs and are not directly and immediately linked to certain output transactions, i.e. the advisory services have not been explicitly incurred for the share deal (ECJ SKF, C-29/08, cf. Tax Info No. 10). It is to be determined pursuant to the objective intended use of the acquired services whether there is a direct and immediate link to a certain output transaction.