(French Administrative Supreme Court, Dec. 26, 2013, no. 350797)

The decision of December 26, 2013 of the French Administrative Supreme Court is a new illustration of its position about the deductibility of VAT relating to expenses incurred by a holding company.  In the case at hand, the discussion arose about the possibility to deduct the VAT on expenses incurred in relation to a litigation involving a shareholder of a subsidiary in the context of a sale of shares.

The Supreme Court states that expenses incurred by a holding company to increase its shareholding in a subsidiary or to participate in the subsidiary’s capital increase can be viewed as part of its overhead costs.  Therefore, these expenses are directly linked with its overall economic activity and the company is entitled to recover the VAT in proportion of its ratio of recovery.  The reasoning is the same for expenses incurred to preserve its shareholder’s rights : VAT is deductible except if these expenses are supported for pure patrimonial management purposes.  In the case at hand, the right to deduct the VAT is denied to the extent the company was enable to prove that the expenses incurred related to the business.

The High Court also reminds that when a holding company that carries out an economic activity for which it is subject to VAT, intends to sell all or part of its shares in a subsidiary and incurs expenses prior to the transfer, the VAT charged on the given expenses is deductible, even if, at the end of the discussion with the potential buyer, the deal is not finalized.  However again VAT is not deductible, in the absence of direct link with the taxable business of the seller or in the case where the profit resulting the deal is distributed or if the expenses are included in the sale price of the shares.   In this regard, the fact that the shares are listed on the stock market and that their selling price does not result from the sales agreement but from an external source is not viewed by the High Court as a relevant evidence.  As a consequence, the taxpayer has still to demonstrate that he has definitively incurred the selling costs.

The decision of the Supreme Court, mainly justified by the lack of evidence supplied, illustrates the practical difficulties the companies face with in trying to recover VAT on expenses relating to their portfolio of shares.