VAT recovery on the disposal of shares in a subsidiary undertaking

KPMG has acted as representative in a case before the Supreme Administrative Court (SAC) in Sweden concerning the fundamentally important question of whether a holding company that provides management services to its subsidiaries can recover VAT on costs it incurred in relation to the disposal of shares in its subsidiaries as input tax.

The Swedish Tax Agency (STA) argued that the costs for the disposal could not be linked to the holding company’s taxable business unless the raised funds were used in an economic activity separate from the shareholding i.e., in an economic activity consisting of taxable transactions.

In an earlier judgment, the Administrative Court of Appeal (ACA) had agreed with the STA that the funds obtained from the disposal of shares could not be considered beneficial to the holding company's business. Therefore, the holding company did not have the right to recover the VAT incurred on the costs in relation to the disposal of the shares of the subsidiary. The taxpayer appealed the ACA’s judgement to the SAC.

The SAC granted a leave to appeal on the question of whether a holding company that is involved in the management of its subsidiaries has the right to recover VAT charged on professional services it has incurred in respect of the disposal of the shares in its subsidiary. 

The SAC concluded that the settled Court of Justice of the European Union (CJEU) case-law does not support a distinction in the right to recover VAT depending on the basis that the economic activity carried out by a taxable person is in respect of third parties as opposed to related parties. The SAC stated that the fact that the holding company's business activity consists of providing management services to its subsidiaries does not, in itself, preclude the holding company’s right to recover VAT on professional services it incurred in connection with the disposal of the shares on the basis that the costs constituted general overheads  of the holding company.

SAC further concluded that the purpose of the restructuring and the disposal of the shares was to improve efficiency and increase sales within the remaining activities in the holding company and to secure funds for the corporate group. It was also clear from the circumstances of the case that the profit from the sale was allocated to the head office function of the holding company. Furthermore, it was common ground that the costs of the share sale could not be passed on to the purchasers of the shares. Given these conditions, the SAC concluded that the costs may be assumed to have been a component of the price the holding company charged its subsidiaries for the services it provided to them.

The SAC therefore concluded that the costs in question could be considered to have a direct and immediate link to the economic activity of the holding company, which is a prerequisite for exercising the right to recover VAT as input tax.

As an alternative argument, the STA had stated that even if the right to recover VAT as input tax is allowed, the input tax deduction should be restricted for the effect of the exempt sale of shares in the subsidiary and the subsidiaries in which the holding company held shares in a passive holding company capacity.  

The STA concluded that, given that STA’s argument above was not previously presented before the court, the ACA had no reason to consider whether the right to recover VAT should be restricted in the manner argued by the STA. The SAC stated that it should not consider the question arising from that argument as the court of first instance and referred it back to the ACA for further consideration.

In its ruling, SAC has provided clear guidance on the principles allowing a right to recover VAT incurred on share disposal cost of a holding company that is involved in the management of its subsidiaries.

The SAC does not share the STA's view that the assessment should depend on the type of economic activity in which the taxpayer is involved. Instead, the assessment is based on whether the costs can be considered to have a direct and immediate link to the taxpayer's overall economic activity. According to the SAC, such link exists if the costs have a direct and immediate link to the overall economic activity of the holding company and are among the components of the price of the services that the company has provided to its subsidiaries. The SAC also found that the costs were not incorporated in the price of the shares sold.

The decision is in line with HFD 2017 ref. 20. At the same time, the current ruling provides a long awaited clarification by the SAC, that a right to recover input VAT on share disposal costs also applies for holding companies that do not engage in external VAT-taxable activities.

The SAC's referral of the right to recovery restriction question back to the ACA, is a consequence of the STA putting that forward as an alternative argument before the SAC. The SAC is prevented by the procedural rules (instansordningen) from examining the question as the court of first instance. However, the SAC clearly states that it can be assumed that the costs in question were incorporated in the price of the services provided by the company to its subsidiaries. For this reason, we are of the opinion that the SAC's decision in the case, in practice, means that there should be no limitation on deduction.

Please feel free to contact us for a discussion about what this may mean for your business and for your previously denied recovery of input tax linked to share disposals.

The representatives in the case were Susann Lundström, Partner, Indirect tax, and Thomas Andersson, Head of Tax disputes.

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The article in Swedish