In SZEF Krajowej Administracji Skarbowej v Polfarmex Spółka Akcyjna w Kutnie (Case C‑421/17), the Court of Justice of the European Union (CJEU) has confirmed that the transfer by a company to one of its shareholders, on a buy-back of the company’s shares, of ownership of immovable property, is a supply of goods for consideration subject to VAT provided the property is used in an economic activity by that company.
Polfarmex, a limited company with its registered office in Poland, manufactures pharmaceutical products and as such is subject to VAT.
Polfarmex planned to restructure its share capital through the buy-back of part its shares held by a limited liability company, using one of the methods of “redemption” provided for by the Companies Code. The compensation due by reason of that redemption would be the transfer, in favour of the other company, of ownership of some land and the buildings (including equipment in the buildings).
Polfarmex made an application to the appropriate Minister for a tax ruling in order to determine whether the redemption of the shares held by the limited liability company and the transfer of ownership of immovable property in favour of that company, would be subject to VAT.
In his ruling, the Minister took the view that the transfer of immovable property in return for the redemption of shares should be regarded as a supply of goods for consideration subject to VAT. In the view of the Minister, there would be a binding relationship between the parties to the transaction. Polfarmex committed to transfer to the limited company ownership of immovable property and the shares redeemed constituted the consideration for that transfer. Accordingly, since there would be a supply of goods for consideration, the transaction would be subject to VAT.
Polfarmex brought an action before the Regional Administrative Court in Poland seeking annulment of that ruling.
The Administrative Court annulled the tax ruling. It was of the view that the transaction proposed by Polfarmex would not be a transaction carried out in the course of its economic activity and the examination of the applicability of VAT must cover the entire transaction. Polfarmex was proposing a single transaction, consisting of the redemption of shares combined with the transfer to a shareholder of consideration in kind in exchange for the shares redeemed. Redemption of the shares was therefore closely linked to the transfer of ownership of the assets as payment, those two aspects of the transaction being interdependent. It followed that the transfer of the immovable property to the shareholder could not be considered an autonomous and separate transaction subject to VAT.
The Minister appealed to the Supreme Administrative Court in Poland.
In the view of the Supreme Court, the transfer of immovable property to a company in consideration for the acquisition of the shares which it held in that company, constitutes a taxable transaction within the meaning of Article 5(1), point 1, and Article 7(1) of the Law on VAT. Despite the similarity between the redemption of equity and shares, the question of whether the proposed transaction is subject to VAT raised doubts regarding the condition of acting as a taxable person and the pecuniary nature of that operation since, following the redemption of shares, a company limited by shares receives nothing directly in return as the representative shares in part of its share capital are cancelled and that share capital is reduced on a pro rata basis.
The Supreme Administrative Court therefore decided to refer the following question to the CJEU for a preliminary ruling:
“Does the transfer by a public limited company of immovable property to a shareholder in connection with the redemption of its shares constitute a transaction that is subject to value added tax in accordance with Article 2(1)(a) of Council Directive 2006/112?”.
The CJEU concluded that Polfarmex would make a supply of goods for consideration subject to VAT, by transferring ownership of immovable property (the building) to a shareholder.
Article 2(1)(a) of the Principal VAT Directive provides that VAT is chargeable on supplies of goods for consideration. The CJEU stated that the building would be exchanged for shares and therefore there would be a legal relationship in which there would be reciprocal performance, with each being consideration for the other.
Whilst this judgment is interesting, UK company law requirements may limit the relevance of this decision in the UK. The CJEU’s comments, based on Kretztechnik AG v Finanzamt Linz Case C-465/03, that share redemptions may not be an economic activity, may be of more interest, as buy-backs are generally regarded as exempt.
A copy of the judgment can be viewed here.