Input tax deduction on costs related to intended, but aborted exempt share sale

C&D Foods Acquisition ApS (C-502/17)

The taxpayer is an active holding company that was looking to sell shares in its managed sub-subsidiary. It provided management and IT services to that company, for a fixed fee comprising the staff costs of the taxpayer plus a 10% mark-up. It incurred VAT in relation to the proposed share sale and deduction of that VAT was refused. The earlier AG said that the VAT was not deductible because it related to an intended exempt supply.

The ECJ has taken a different approach and asked itself whether the proposed share sale would have been an economic activity? The purpose of the share sale was to raise funds to pay-off bank debt. In a possibly ground breaking paragraph (38) the Court says that “It follows that in order for a share disposal to be able to come within the scope of VAT the direct and exclusive reason for that transaction must in principle be the taxable economic activity of the parent company, or… the direct permanent and necessary extension of that activity”. Because the share proceeds would have been used to pay off debt (not an economic activity) the ECJ concludes that the share sale would not have been an economic activity. This means that the related VAT would still be irrecoverable, but for a wholly different reason.

It is not immediately clear why the ECJ has chosen to ignore a perfectly logical AGO, which applied the normal principles of VAT that relates to aborted supplies, see Ryanair Ltd (C-249/17), and has instead gone down this different and far more complex route to the same non-recovery destination. Previous case law suggests that the sale of shares in a managed subsidiary company is within the scope of VAT, because the shares have not been held just as a passive investment, and the purpose of the sale and the use of the revenue generated from it has never been an issue. The liability of the share sale (exempt or specified supply, or both), has driven VAT recovery.


As well as complexity, this decision also creates a lot of additional questions concerning the position where the reason for the share sale was the exempt economic activity of the taxable person.  Presumably that would still make the sale non-economic and also mean no recovery. The ECJ is also silent on the recovery position where the share disposal is within the scope of VAT because the proceeds are used in support of a taxable economic activity, but the sale is itself exempt.

There is also another permutation that the ECJ has not covered – situations where the share sale, if within the scope of VAT, would be a specified supply with right of recovery but the proceeds are not used to support a taxable economic activity. The ECJ’s approach creates uncertainty and requires the vendor to know, when VAT is incurred, exactly what the sale proceeds will be used for in order to know how to treat the input VAT. This may not always be possible and a subsequent VAT recovery adjustment may be required.