CJEU | Case C-651/11 | VAT on a Sale of Shares
The transfer of shares in a company cannot, irrespective of the size of the shareholding, be regarded as equivalent to the transfer of a totality of assets or part thereof within the meaning of Article 5(8) of the Sixth Directive [Article 19 of the Council Directive 2006/112/EC], unless the holding is part of an independent unit which allows an independent economic activity to be carried out, and that activity is carried on by the transferee.
This insight examines a Court of Justice of the European Union (CJEU) ruling clarifying when the sale of shares may be treated as a transfer of a totality of assets or part thereof for VAT purposes. The Court confirmed that, irrespective of the size of the shareholding, the disposal of shares does not constitute such a transfer unless the holding forms part of an independent economic unit capable of carrying on an autonomous economic activity, which is continued by the transferee. The judgment provides important guidance on the VAT deductibility of costs incurred in connection with share disposals.
On 30th May 2013 CJEU delivered the judgment in case C-651/11, regarding VAT on a sale of shares. The 30%-shareholder of Dutch company was rendering management services for this company upon a separate contract. After a while he decided to sell his shares and the service contract came to an end. A number of VAT-bearing services were supplied to him in relation to that sale; therefore, the shareholder deducted that VAT in his VAT returns, on the basis that "the disposal of the shareholding constituted the transfer of a totality of assets and of services and that the costs incurred by him in connection with that transaction had to be considered part of the general costs associated with his entire economic activity and were fully deductible".
Tax authorities disagreed and after launching necessary procedural steps, the national court referred to CJEU asking, in essence, whether Articles 5(8) and/or 6(5) of the Sixth Directive [Article 19 of the Council Directive 2006/112/EC] must be interpreted as meaning that the disposal of 30% of the shares in a company – to which the transferor supplies services that are subject to VAT – constitutes the transfer of a totality of assets or services or part thereof within the meaning of those provisions. If not, the referring court wished to know whether the conditions for the application of those provisions are none the less satisfied if, on the one hand, the other shareholders transfer all the other shares in that company to the same person at practically the same time, and, on the other, that disposal is closely linked to management activities carried out for that company.
Regarding whether 30%-shareholding, the Court has interpreted the concept of 'a business or an independent part of an undertaking' as meaning that "it covers the transfer of a business or an independent part of an undertaking including tangible elements and, as the case may be, intangible elements which, together, constitute an undertaking or a part of an undertaking capable of carrying on an independent economic activity"; but it "does not cover the simple transfer of assets, such as the sale of a stock of products. It is also important, in order for Article 5(8) of the Sixth Directive to apply, that the transferee intends to operate the business, or the part of the undertaking, transferred and not simply to liquidate the activity concerned immediately. In that regard it must be stated that, unlike the holding of the assets of an undertaking, the holding of shares in an undertaking is not sufficient to allow an independent economic activity to be carried on".
Therefore, "the transfer of shares in a company cannot, irrespective of the size of the shareholding, be regarded as equivalent to the transfer of a totality of assets or part thereof within the meaning of Article 5(8) of the Sixth Directive, unless the holding is part of an independent unit which allows an independent economic activity to be carried out, and that activity is carried on by the transferee".
Consequently, since the disposal of shares constitutes an exempt transaction, a right to deduct VAT will exist only if the cost of the services supplied to the shareholder in relation to that disposal is part of the general costs relating to his overall economic activity, without being incorporated in the sale price of those shares.
