The case—Société L’Air Liquide, no. 350588 (24 June 2013)—concerns the recovery of VAT when the share acquisition costs were borne by a holding company, but the shares were eventually to be held by a subsidiary.
In principle, a company’s acquisition costs form part of its general costs, and therefore give rise to a right to deduct VAT charged on such acquisition costs up to an amount of the general deductible proportion.
In the case before the court, the issue was the VAT recovery when the acquisition costs were actually borne by a holding company (i.e., head of the corporate group) whereas the shares were going to be held by one of the subsidiaries.
The French tax authorities considered that the VAT borne on these acquisition-related expenses was not deductible by the holding company because these expenses were not incurred in the interest of the holding company’s own operations, but instead in the interest of its subsidiary.
The Conseil d’Etat rejected the tax authorities’ position (thereby overturning a 2011 decision of the Versailles administrative court of appeals).
The high court concluded that there is a right to deduct VAT imposed with respect to such acquisition costs—provided that the acquisition is part of a strategy to increase revenues derived from the holding company’s provision of administrative, legal, and financial services to its new subsidiaries (or sub-subsidiaries).
Accordingly, provided that the holding company is able to demonstrate that, and in considering the group’s organization, only it will conduct / perform for the sub-subsidiaries services giving rise to VAT-able transactions, then the holding company is entitled to deduct the VAT imposed on the acquisition costs—i.e., costs incurred for the purpose of preparing the investment, even if the shareholding is not eventually acquired as planned, and costs that are to be regarded as forming part of the holding company’s general costs and having a direct and immediate link with all of its economic activities.
In light of this decision, any corporate group that intends to purchase French entities needs to be aware of this case law and consider an arrangement that would address any potentially adverse French VAT costs.
For more information, contact a tax professional with Fidal Direction International* in France:
+33 1 55 68 14 47
+ 33 1 55 68 14 34
* Fidal Direction International is a French law firm that is independent from KPMG and its member firms.