On October 29, 2009, the European Court of Justice (“ECJ”) rendered its judgment in the AB SKF case. This case regarded the right to deduct VAT on the costs a parent company incurred in selling participations. There was a great deal of concern that the ECJ would hold that this VAT was non-deductible. According to the judgment, however, there are certain circumstances that confer the right to deduct this VAT.
The case
SKF is a Swedish parent company that holds shares in various participations. They are actively engaged in managing the subsidiary companies and perform management, administrative, and marketing services. SKF has VAT obligations with regard to these services. SKF decided to sell 100% of the shares in a subsidiary, as well as 26.5% of the shares in another company in which SKF previously held 100% of the shares. Advisory fees were incurred in connection with this sale. VAT was charged on these fees. The Swedish tax authorities took the position that the input VAT on the services relating to the sale of the shares could not be deducted.
The case was ultimately taken to the highest Swedish court, which submitted questions to the ECJ for a preliminary ruling.
The judgment
The ECJ held that, given that SKF was involved in managing its subsidiaries, the sale of the shares constituted an economic activity.
According to the ECJ, the ruling would be different if the sale were considered to be a transfer of a totality of goods and/or services. This means that a seller can deduct VAT on advisory fees as a general expense, necessarily taking into account a possible pro-rata deduction percentage. It must be noted here that this particular regulation for a totality of goods and/or services is optional for the EU Member States, and has therefore not been implemented in all EU Member States.
According to the ECJ, a sale of shares is generally a VAT-exempt activity. This position implies that a seller is generally precluded from deducting VAT incurred on advisory fees. The ECJ, however, has provided more leeway for claiming that a party is entitled to deduct the VAT if the advisory fees are incurred in direct relation to SKF’s economic activities as a whole (i.e., with its normal turnover). The ECJ held that one factor that is relevant is whether the expenditures are included in the price of the shares sold or whether they comprise part of the activities SKF performs. In the first case, the input VAT is allocated to the VAT-exempt sale and no right to deduct input VAT is conferred. In the other case, the input VAT may be deducted based on the pro-rata deduction.
Finally, the ECJ held that whether the share transfer took place in a single transaction or in consecutive transactions was irrelevant to answering the questions.