Recovery of VAT on costs incurred in the event of an unrealized transfer of securities

The context is as follows. C&D FOODS is the holding company of a group of companies. This company indirectly owns AROVIT PETFOOD via a subholding company. C&D FOODS provides management and IT services, subject to VAT, to AROVIT PETFOOD. The shares of C&D FOODS were acquired for one euro by a credit institution due to the failure of the former owner to repay a loan granted to him by the latter.

This credit institution sought to sell the shares of AROVIT PETFOOD in order to be reimbursed. In this context, consulting agreements were concluded and fees were paid by C&D Foods. However, no acquirer was found and the transfer process was terminated.

The VAT dispute arises from the contestation of the recovery of VAT on the costs incurred.

The question of the recovery of VAT on the costs of transferring securities has already given rise to the AB SKF decision held by the ECJ on 29 October 2009 (ECJ 29 October 2009, SKF, C-29/08) and the PFIZER decision held by the Conseil d’Etat on 23 December 2010 (EC, 8th and 3rd sub-sections, 23 December 2010, No 307698, Sté Pfizer Holding France). These precedents must be recalled because it is very likely that, in the light of these two decisions, VAT would have been considered deductible in the case in question. Indeed, to the extent that the sale of securities does not take place, the PFIZER judgment teaches us that the VAT charged on costs is deductible as overheads. However, this is not the solution adopted by the C&D FOODS decision.

If we make it simple, this decision assumes that an assignment that does not take place must follow the regime that would have been its own had it been completed. In the particular case, the court noted that in this case the deduction is not allowed because the transfer would have been placed outside the scope of VAT. Such a solution appears severe since the absence of a transaction could have led to the costs in question being linked to C&D FOODS’ overheads and to a recovery based on the principle of neutrality.

The analysis of the judgment leaves one perplexed and one may legitimately wonder whether is unique, motivated by the exceptional circumstances surrounding the case.

Several elements militate in this direction.

In view of the questions raised by the national court, the question whether the costs should actually be borne by C&D FOODS was not examined.

The analysis adopted by the Court quickly losts the reader. First of all, the judge does not follow the steps he recalls in the introduction, which result from the AB SKF judgment, namely (i) the VAT regime of the transfer, (ii) the principle of the right to deduct and (iii) the determination of the quantum of deductible VAT.

The judge refers to the AB SKF judgment without following the principles it was supposed to contain. It was understood from AB SKF that the qualification of the transfer was irrelevant since the overhead costs were applicable whether the transfer was placed outside the field or in the field, VAT exempt.

The court in this case considers the criteria of scope (is the transfer outside the scope or VAT-exempt) and the right to deduct (overhead theory) to be applicable both to the transaction and to the expense.

In the end, in the light of a (very obscure) hybrid and complex theory, it appears that the transfer is outside the scope of VAT and that the right to deduct is not allowed.

Goodbye to the involvement theory as a marker for a VAT-exempt transfer! Goodbye to the non-incorporation in the sale price test to open the way to overhead costs!

The circumstances of the transfer become crucial, including the consideration of factors external to the transferring company. Thus, in the particular case, the fact that the transfer is not made to reinject the proceeds of the sale into the business, but to distribute to the shareholder/financial institution, is a first blocking factor.

The fact that the transfer of the shares does not result from the cessation of the taxable activity of management services and IT services is the second blocking factor retained by the judge.

In the end, even if we can understand the solution that the judge wanted in this case, the wording of the C&D FOODS decision is so confusing in terms of principles that it could not be used as a guide in another case. 

William Stemmer

William Stemmer, Partner, has more than 15 years’ experience in Indirect Tax matters. William particularly specializes in the real estate and financial sectors. William is a lecturer at the University […]

Bertrand Jeannin

Bertrand Jeannin, Partner, supplies strategic and technical advice to French and foreign multinational groups in all aspects of their VAT and customs policies. Major focuses of Bertrand’s input involve the […]