Is the VAT on the expenses incurred for a sale of shares recoverable? (update of the article in the Tax Letter of October 2008 – November 2008)
The issue of the deductibility of the VAT relating to the expenses incurred by a taxpayer for a sale of shares (e.g., counsels’ fees, brokerage costs) has for several years resulted in abundant national and European case law which has generally moderated the strict position of the French tax authorities.
Indeed, the French tax authorities consider that “the VAT related to expenses incurred for a sale of shares [...] is not recoverable since these expenses have a direct and immediate link with an operation that does not give rise to VAT deduction” (Guidelines 3 A-1-06 of January 10, 2006, No. 9).
For several years, first level jurisdictions have found that providing these expenses have a direct and immediate link with the whole economic activity, the expenses incurred by an entity for a sale of its shareholding in a subsidiary may form part of its overhead costs, which in practice permits a total or partial input VAT deduction relating to such expenses (see in particular Administrative Court of Appeal of Paris May 21, 2007, No. 05PA03817, SCA Pfizer Holding France).
The European Court of Justice, in the AB SKF case dated October 29, 2009, confirms such analysis and specifies that the jurisdiction has to determine, taking into account all the circumstances in which the transactions in question occur, if the expenses incurred are likely to be incorporated in the price of the shares sold (in which case the deduction of VAT is not permitted) or if they form part of the costs of the transactions that are directly related to the economic activities of the taxpayer (in which case VAT deduction is permitted).
A recent decision of the Paris Administrative Court of December 9, 2009 seemed contrary to the recent trend of case law and in certain aspects, represents a movement towards the administrative position.
However, the Conseil d’Etat (French Supreme Administrative Court), seized for the first time on this issue, has recently ruled in a decision of June 10, 2010 that the expenses (in this case the brokerage costs charged by a bank) borne by a company for a sale of marketable securities, an action which is outside the scope of application of VAT, constituted overhead costs that were related to the taxable economic activity of the company and are consequently, deductable, since the company in question was experiencing financial difficulties and such a sale was necessary to enable the company to continue operating.
This decision has the double effect of condemning the ‘extreme’ position adopted by the French tax authorities and harmonizing national and European case law.
Nevertheless, it is difficult to infer a general application to this decision in future as it is based purely on the circumstances of that particular case.
If, as seems to be the case, it is now established that VAT deductibility on expenses related to the sale of shares cannot be refused in theory, the circumstances in which such expenses will be considered overhead costs that can be related to the economic activity of the company should be rare in practice.
As an example, the circumstances quoted by the aforementioned decision of the Paris Administrative Court of May 21, 2007 include forced sale, merger, demerger, direct or indirect share contribution, continuation of the activity of the taxpayer in difficulty (situation of the decision of the Conseil d’Etat).
In future cases, the Courts will take a subjective approach and analyze each case based on its individual circumstances.