CJEU: the sale of a participation should not simply be regarded as a transfer of a going concern for VAT purposes

Publication date 04 June 2013

In the judgment rendered on May 30, 2013, in the X BV case, the Court of Justice of the European Union (CJEU) concluded that, for VAT purposes, the sale of a participation should not simply be regarded as a transfer of a going concern, whereby the assets and liabilities are continued.

Why is this important?
The entitlement to recover input VAT on transaction costs in a share transaction differs from a transfer of a going concern:

·        When the assets and liabilities of a company are sold to a purchaser who continues the business (i.e. a ‘transfer of a going concern’), no VAT is due based on Article 37d of the Dutch VAT Act. The input VAT on the services purchased for the transfer is recoverable by the vendor, insofar as the business operations or the transferred business gives an entitlement thereto.

·        When shares in a company that operates a business are transferred, the VAT exemption of Article 11(1)(i) of the Dutch VAT Act may apply. The application of this exemption means that the recovery of input VAT on the transaction costs may, in principle, be limited for the vendor.

Background to and outcome of the case
In light of the above distinction, X BV argued that the transfer of its 30% shareholding in a participation is the same as a transfer of a going concern.

The CJEU disagreed. The CJEU is of the opinion that the sale of shares is a stand-alone transaction. A transfer of 30% of the shares in a company cannot be regarded as a (partial) transfer of a going concern. Not even if the remaining 70%, held by other shareholders, is also transferred to the same purchaser at nearly the same time.

However, the judgment makes clear that the CJEU does consider there to be situations whereby a share transaction can be regarded as an untaxed transfer of a going concern. This would need to concern specific circumstances whereby the share transaction is part of a (as we understand it ‘more comprehensive’) business transfer.

Practical consequences
In practice, the outcome that share transactions cannot simply be regarded as a transfer of a going concern is somewhat disappointing, as this could lead to more discussions with the Dutch Tax Authorities about the entitlement to recover input VAT on transaction costs. However, the concessionary policy adopted by the Ministry of Finance as well as case law could make it possible to mitigate the non-recoverable input VAT in respect of share transactions.