Deductibility of VAT on expenses incurred for the purchase of shares by a holding: a helpful French Supreme Court decision

Abstract

In June 2013, the French Supreme Court issued a favourable decision concerning VAT deduction on expenses incurred in the course of a share purchase transaction. This article revisits the context of this decision and explains the case. L’Air Liquide SA is an active French holding company involved in industrial gas production and also in the management of its subsidiaries. L’Air Liquide SA had planned to purchase 11 subsidiaries of the Messer Group, a competitor of Air Liquide SA. To achieve this purchase, L’Air Liquide SA hired the services of a French bank and an audit firm. After the preliminary due diligence work, however, L’Air Liquide SA decided not to purchase five of the targeted subsidiaries. L’Air Liquide SA finally concluded a sale purchase agreement with the Messer Group for the six remaining subsidiaries, which also provided a substitution clause to the benefit of one of its subsidiaries: Air Liquide International, an old sub-holding entity which mainly owned non-French subsidiaries. Ultimately, relying on this clause, it was Air Liquide International that acquired the subsidiaries from the Messer Group. The French tax administration denied the deductibility of VAT on the costs incurred for the purchase of the subsidiaries by L’Air Liquide SA. The French tax administration argued that L’Air Liquide SA was not the effective beneficiary of the transactions as it never intended to buy the shares itself. Thus, it had no economic purpose for incurring the costs involved in the deal.