The ECJ has decided that the transfer of shares in a company cannot, irrespective of the size of the shareholding, be a transfer of a going concern for VAT purposes unless the holding is part of an independent unit that allows an independent economic activity to be carried out and the transferee carries out that activity.
In 1996, X BV (X) held 30% of the shares in A BV (A). Three other Dutch companies held the remaining shares in A. X and two of the other shareholders in A were members of A’s management board and carried out management work for A in return for remuneration. At the end of 1996, X and the other shareholders in A sold their shares to D Plc, the management work for A ended and X resigned from A’s board.
X received various vatable supplies of services in relation to that share sale. X deducted the VAT in its VAT returns on the basis that the disposal of its shareholding constituted the transfer of a totality of assets under Articles 5(8) and 6(5) of the Sixth VAT Directive (a transfer of a going concern (TOGC)) and that X’s costs in connection with that transaction had to be considered part of its general overheads and were, therefore, fully deductible.
The Netherlands tax authority rejected the deduction and issued a notice of additional assessment. It dismissed X’s appeal against that notice although it reduced the amount of the assessment. The Gerechtshof (Regional Court of Appeal) allowed X’s appeal against the tax authority’s decision and cancelled the notice of additional assessment. According to the Gerechtshof:
The transfer of X’s shareholding was not within the scope of VAT because it was not an economic activity.
However, the input VAT could be deducted since the shares were sold and transferred in conjunction with acts that X carried out as a trader.
The Staatssecretaris van Financiën appealed against the Gerechtshof’s judgment to the Hoge Raad der Nederlanden (Netherlands Supreme Court), which referred the following questions to the ECJ:
- Is the disposal of 30% of the shares in a company, to which the transferor of those shares supplies vatable services, a TOGC within the TOGC provisions?
- If the answer to the first question is in the negative, is that disposal a TOGC within the TOGC provisions if the other shareholders, who also supply vatable services to the company whose shares have been disposed of, transfer all the other shares in that company to the same person (almost) at the same time?
- If the answer to the second question is also in the negative, can the disposal referred to in the first question be regarded as a TOGC within the TOGC provisions, given that the disposal is closely linked to management activities carried out for that interest?
The ECJ’s decision
The ECJ decided that the transfer of 30% of the shares in a company is not a TOGC within the TOGC provisions, that all the shareholders disposing, to a single person, of all the shares in the company is also not a TOGC within the TOGC provisions and that it is irrelevant that the management activities ceased simultaneously with the share transfer.
The ECJ was also of the view that the transfer of shares in a company could not, irrespective of the size of the shareholding, be a TOGC unless the holding was part of an independent unit that allowed an independent economic activity to be carried out and the transferee carried out that activity. Merely disposing of shares, without the transfer of assets, did not allow the transferee to carry on an independent economic activity as the transferor’s successor. Therefore, the transfer of 30% of the shares in a company was not a TOGC within the TOGC provisions.
The ECJ considered that its conclusion did not defeat the purpose of the TOGC provisions. Those provisions were designed to facilitate business transfers by making them simpler and by preventing the transferee from incurring a disproportionate VAT charge that would, in any event, ultimately be recovered. In the present case, the transferee bore no VAT: the sale of shares was not an economic activity that was subject to VAT or was exempt under Article 13B(d) (5) of the Sixth Directive if it was effected to secure involvement in the management of the relevant company.
The decision of the ECJ appears to state that a holding company’s sale of shares in its subsidiaries can never be a TOGC. However, it does confirm that the sale of shares can be a TOGC if the shareholding is part of an independent unit that allows an independent economic activity to be carried out and the transferee carries out that activity.
The mere acquisition, holding and disposal of shares is not an economic activity so, if a holding company has no involvement in the management of the subsidiaries, the disposal is not an economic activity and is, therefore, outside the scope of VAT.
The result is that, if a holding company does manage its subsidiaries, the ECJ will consider the management activity to be a separate undertaking to the activity of holding shares, the former being capable of TOGC treatment but the latter not.
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