Interests of bonds convertible into shares and VAT prorata

The Supreme Court recalls the solution held by the CJEU in the EDM case (April 29, 2004; aff.C-77/01) according to which the annual grant by a holding company of remunerated loans to companies in which it holds a participation is considered as a VAT exempt (within the scope) economic activity, which must be regarded as ancillary when it involves only a limited use of goods or services for which VAT is due.

Considering the acquisition by a holding company of bonds issued by a subsidiary and the revenue arising therefrom, it is necessary to determine whether this revenue should be considered in the denominator for the VAT prorata ratio, to verify whether this revenue should be analyzed as an income for the holding company (loan granted to its subsidiary) and, if so, whether these operations should be regarded as ancillary transactions (not to be included in the denominator because involving only a limited use of goods or services for which VAT is due).

The Supreme Court annuls for error of law the decision of the Court of Appeal, which had rejected the mean according to which the interests of bonds convertible in shares are out of scope of VAT, on the basis that the acquisition of bonds convertible into shares and financial incomes directly contributed to the acquisition of the company and developed the business. The court specifies regarding bonds convertible into shares that it is first necessary to determine whether the revenue resulting therefrom constitutes the remuneration of a loan by the holding company to its subsidiary and, if so, whether such revenues qualified as ancillary transactions.

Michel Guichard

Michel Guichard, Partner, leads the Indirect Tax activity. With more than 30 years’ experience in International and French Tax law, he advises his clients on indirect tax matters. Michel is […]