• Illustration of the VAT Recovery Principles Applicable to Sales of Shares
  • May 15, 2015 | Authors: Nicolas Andre; Siamak Mostafavi
  • Law Firm: Jones Day - Paris Office
  • The Conseil d'Etat has already had the opportunity to rule on the recoverability of the input VAT attached to the costs pertaining to an acquisition of shares.

    In a 2010 decision, the Conseil d'Etat had distinguished between (i) costs pertaining to an acquisition that does not occur (the corresponding VAT being recoverable as a general expense), and (ii) costs pertaining to an acquisition that does occur (the corresponding VAT then being entirely or partially recoverable, except where (a) the profits arising from the sale of the shares are upstreamed to the seller's holders, or (b) the corresponding costs are incorporated into the acquisition price).

    In a 2013 case, the Conseil d'Etat ruled that acquisition costs borne by a non-passive holding company form part of its general costs, and the corresponding input VAT is recoverable in proportion to the company's general VAT recovery ratio, provided inter alia that the company is able to demonstrate that the acquisition was part of a strategy to increase the profits arising from the services provided to the newly acquired subsidiaries.

    In a decision dated March 31, 2015, the Appeal Court of Versailles reviewed several invoices sent by service providers to the taxpayer in connection with several sales of shares. The Appeal Court applied both the principles provided by the Conseil d'Etat decisions above and the general so-called direct link principle whereby (i) input VAT may be recovered to the extent that it pertains to expenses that are directly linked to operations that are subject to VAT, although (ii) input VAT pertaining to general expenses remains recoverable notwithstanding the absence of a direct link.

    As a result, the Appeal Court reviewed each invoice together with the context of the relevant sale of shares, and inter alia ruled:
    • Legal fees invoices that do not specify the nature of the legal services provided: The corresponding input VAT may not be recovered by the taxpayer to the extent that it does not demonstrate that the corresponding costs have not been incorporated into the sale price;
    • Consulting fees invoices pertaining, according to other contextual elements, to the preparation and analysis of the conditions and consequences of the sale (i.e., services that would have also been rendered had the sale not occurred): The corresponding input VAT was recoverable to the extent of the fraction of the sale that was subject to VAT (i.e., the fraction of the sale corresponding to the sale of assets, excluding shares and real estate assets whose transfer was not subject to VAT), on a pro rata basis;
    • Legal fees invoices sent to a subsidiary of the taxpayer: The corresponding VAT was recoverable provided that the taxpayer was able to demonstrate that (i) the relevant sale of shares allowed a reorganization of its own subject-to-VAT activities (i.e., thereby making the corresponding fees general expenses) and (ii) the FTA did not evidence that the profits arising from the sale of shares were upstreamed to the seller's holders.