Insights | July 3, 2019

Supreme Administrative Court’s ruling confirms further the input VAT deductibility of transaction costs relating to share disposal

The Supreme Administrative Court of Finland has recently decided an interesting case, which confirms and clarifies the current situation in Finland regarding the right to deduct input VAT relating to share disposal of subsidiaries and mutual real estate companies.

On 20 June 2019, the Supreme Administrative Court of Finland (SAC) decided an interesting case regarding input VAT deduction related to share disposal by a parent company of its subsidiaries and mutual real estate company (MREC).

Background

SAC’s ruling KHO 2019:81:

A Oy (“the Company”), a limited liability company and the parent company of an international corporate group, provided administrative services subject to VAT to its subsidiaries. As a result of restructuring in the corporate group, the Company disposed the shares of three of its subsidiaries and MREC in 2012 and 2013. In order to carry out the disposals, the Company acquired services subject to VAT in the area of assistance with negotiations, preparatory legal advice and other IT and reporting services. The Company applied for a preliminary ruling on the right to deduct input VAT paid on these supplies of services.

The SAC confirmed that the objective of the disposal of shares of the subsidiaries at issue was to restructure the corporate group and to use the proceeds of the sale directly to the taxable economic activity of the parent company or to the economic activity carried out by the group. The costs were not covered directly by the price of the shares but were, as such, components of the price of the goods or services which the Company supplies and therefore deductible as the Company’s general costs.

The MREC in question owned the Company’s head office facilities and 50 % of a parking building. The disposal of shares of the MREC involved a sale and leaseback arrangement where the shares were acquired by a private equity fund which leased the facilities back to the Company’s disposal after the transaction.

The SAC confirmed that the disposal of shares of the MREC was within the scope of VAT and thus the costs were to be treated similarly as the expenditures relating to disposal of the shares of the Company’s subsidiaries. The SAC also emphasized that the facilities remained in usage of the Company’s economic activity because of the sale and leaseback arrangement. Therefore, the costs relating to disposal of shares of the MREC had a direct and immediate link with the Company’s economic activity as a whole and thus were deductible as the Company’s general costs.

The impact of the ruling

Important considerations arise from the ruling. In the ruling SAC confirmed that in case of a sale of subsidiaries, input VAT deduction may be possible if the parent company is involved in the administration of the subsidiaries by providing taxable supplies. This also requires that there is a direct and immediate link between costs incurred and the taxable services provided to the target company. However, this assessment should not be carried out without taking into account the circumstances and economic activities of the parent company as a whole.

The Court of Justice of the European Union (“CJEU”) has also stated in its previous case law that  the exclusive reason for the transaction at issue should be taken into account, since that reason must be regarded as a criterion for determining the objective content. SAC’s decision also highlights that it is important to ensure that the transaction is carried out with a view to allocating the proceeds of the sale directly to the taxable economic activity of the parent company or to the economic activity carried out by the group.

According to SAC’s previous case law there has been uncertainty whether or not the taxpayer has the right to deduct input VAT costs relating to disposal of shares of MREC. In its current decision the SAC clarifies the VAT treatment of these situations in Finland by confirming that the right to deduct the input VAT on transaction costs relating to disposal of shares of MREC should also be possible as general costs if the expenditures have a direct and immediate link with the taxpayer’s economic activity as a whole. The SAC also emphasizes that the right to deduction may require that the facilities remain in usage of the taxpayer’s economic activity (in the ruling’s situation this was achieved by the sale and leaseback arrangement). This however should not mean that in situations similar to the one in the current SAC’s ruling the right to deduct input VAT requires use of sale and leaseback arrangement, if the taxpayer can otherwise demonstrate sufficient and convincing arguments that the costs have a direct and immediate link with the taxpayer’s economic activity as a whole.

Key VAT takeaways from the ruling

The ruling highlights the importance of careful planning in advance and documentation relating to share transfers and parent company’s economic activity. It also clarifies the current situation in Finland regarding the input VAT deduction’s relation to the share disposal of subsidiaries and MRECs.

The SAC’s ruling confirms that the right to deduct VAT is possible as far as certain conditions are met. The deduction is possible if the proceeds of the share disposal are directly used to the taxable economic activity of the parent company as a whole and not e.g. distributed to shareholders. It is also required that the price of the share disposal is based on commercial fundaments, i.e. the costs are not directly covered by the price of the shares. In respect of disposal of shares in MREC, it is sufficient in a typical sale and leaseback transaction that the facilities remain in usage of the taxpayer’s economic activity or the taxpayer can otherwise demonstrate sufficient and convincing arguments that the costs have a direct and immediate link with the taxpayer’s economic activity as a whole. We are happy to discuss the ruling and its possible influence and prospects to your current business activities and assist recovering any possible unclaimed input VAT deduction relating to share disposal of subsidiaries and MRECs for the years 2016 – 2019.