ECJ Case C-502/17 (C&D Foods Acquisition) – Judgment- Deduction input VAT for Holdings; Sales of shares

Judgment of the European Court of Justice (ECJ) on 8 November 2018 in Case C‑502/17 (C&D Foods Acquisition ApS) regarding the deduction of input VAT for holding companies relating to sales of shares

Relevant articles in the EU VAT Directive

Articles 2, 9 and 168 of Council Directive 2006/112/EC

Article 2(1)

‘The following shall be subject to VAT:

…

…’

Article 9(1)

‘“Taxable person” shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.

Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as “economic activity”. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.’

Article 168

‘In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:

(a) The VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;

…’

Facts (simplified)

The Danish company C&D Foods is part of the international group Arovit. It held 100% of the shares in Arovit Holding, which in turn held all the shares in Arovit Petfood. A further 13 companies based in various European countries belong to the group and the shares are held by Arovit Petfood.

C&D Foods carried out various management and IT services subject to VAT on behalf of its granddaughter, Arovit Petfood, on the basis of a management agreement, including accounting, creditors’ and accounts receivable administration and budgeting. As compensation, C&D Foods received an amount that corresponded to the wage costs, plus a profit margin of 10% and the Danish VAT at the rate of 25%. As far as the other companies of the group are concerned, the role of C&D Foods remained limited to owning the shares in these companies.

In 2009, the Icelandic financial institution Kaupthing Bank acquired the Arovit group, which was in economic difficulties. Kaupthing Bank instructed several accountancy firms and the law firm Holst Advokater to investigate the extent to which a restructuring of the Arovit group was possible. In this context, Kaupthing Bank concluded consultancy agreements with the advisers involved, whose fees, plus VAT, were paid by C&D Foods.

The law firm also drafted at least one draft agreement for C&D Foods for the sale of C&D Foods’ shares in Arovit Holding and Arovit Petfood to a buyer not named at that time. For that consultancy work, the law firm invoiced C&D Foods the corresponding fee plus VAT. However, the intention to sell the shares was abandoned in autumn 2009 because no buyer could be found.

C&D Foods requested that the VAT paid to the law firm and the accountancy firms be deducted. Both the Danish Customs and Tax Authority and, after administrative appeal had been lodged, the Landsskatteret (highest administrative authority for tax matters, Denmark), however, refused the deduction of VAT. They argued that the consultancy services had not been carried out for the benefit of C&D Foods and furthermore that for the expenditure the requirement that they were related to the taxed C&D Foods transactions at a later stage was not met.

Questions

(1) Is a holding company entitled to the full deduction of VAT on the costs of services at an earlier stage related to due diligence-examinations carried out in anticipation of an intended, but unrealized, sale of shares in a subsidiary for which the holding carries out management and IT services in the field of management and IT?

(2) Is it important that the price for the management and IT services provided by the holding company in the course of its economic activities is a fixed amount corresponding to the wage costs of the holding company plus a profit margin of 10%?

(3) Regardless of how the foregoing question is answered: can there be a right to deduct input tax on the consultancy costs at issue in the main proceedings as general costs and, if so, under what conditions?

AG Opinion

(1) Article 9(1) of Directive 2006/112/EC is to be interpreted as meaning that economic activity within the meaning of that provision includes, in addition to the preparatory acts for the establishment of that activity, the acts which lead to its termination. For that reason, the disposal of shares in a sub-subsidiary, by which a taxable activity which was previously exercised is terminated, namely the involvement in the management of that company in order to carry out taxable transactions, constitutes an economic activity within the meaning of Article 9(1) of Directive 2006/112.

(2) Article 168 of Directive 2006/112 is to be interpreted as meaning that a holding company cannot claim a deduction of input tax for consultancy services that are subject to VAT which were availed of prior to a proposed disposal of shares in a sub-subsidiary if there is a direct and immediate link between those consultancy services and the intended transactions arising from the sale of the shares which are tax exempt under Article 135(1)(f) of Directive 2006/112. This is a matter for the national court to determine.

Decision

Articles 2, 9 and 168 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that a share disposal transaction, envisaged but not carried out, such as that at issue in the main proceedings, for which the direct and exclusive reason does not lie in the taxable economic activity of the company concerned, or which does not constitute the direct, permanent and necessary extension of that economic activity, does not come within the scope of value added tax.

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