Application of the AB SKF case in France

Abstract

The sine qua non of the right to deduct VAT is that expenses are allocated to taxable operations or to exports. For every single expense, one has to determine whether it contributes to the realisation of a specific, taxed supply of goods or services or to export. This question is particularly difficult when it concerns expenses linked to the sale of shares. A sale of shares may fall outside the scope of VAT or fall inside and be exempt. It falls outside the scope if the seller is not involved, habitually, in the activity of sale of shares or if the sale is not linked to an economic activity falling within the scope of VAT. It falls within the scope and is exempt if it relates to an economic activity. When the sale of shares falls outside the scope or falls within the scope and is exempt, a priori, there is no right to deduct input VAT. This was the solution adopted by the ECJ from the BLP Group case of 6 April 1995 until the AB SKF case of 29 October 2009. In respect of financial operations, the ECJ found a solution on 8 June 2000: namely, the notion of ‘overheads’. If expenditures relate to a non-taxable financial operation and constitute overhead costs linked to taxable economic activities, they give rise to the right to deduct input VAT. This solution was adopted by the ECJ in the Midland Bank case, which related not to a sale of shares but to an attempt to buy shares, and this solution has had an impact on both practitioners and the ECJ. The solution regarding overheads was reaffirmed in the Abbey National case, dated 22 February 2001. That case concerned the transfer of a totality of assets, which was ‘neutralised’ for VAT purposes, ie it did not trigger any tax liability or an obligation to adjust input VAT. The Cibo Participations case of 27 September 2001 dealt with the acquisition of shares and not with the sale of such shares. On 23 October 2001, the French tax authorities authorised the deduction of VAT for activities relating to capital. However, the interpretive guidelines do not mention sale of shares. They deal with activities relating to the introduction of shares on a regulated market, capital increases, acquisition of holdings in subsidiaries (with or without participation in the management of the company), mergers, demergers, and contributions of a business or part of a business. The same guidelines deal with the calculation of the deductible proportion. It should be stressed that the guidelines deal with the acquisition of a substantial holding (meaning investment for a long-term period granting an influence in the management of the company, referred to below as ‘substantial participation’) and not portfolio investments.