When it comes to VAT
For VAT purposes, holding shares is not considered an economic activity and therefore does not fall within the scope of entrepreneurship, making VAT non-deductible. Even if holding shares were regarded as part of entrepreneurship for VAT purposes, the sale of shares remains a VAT-exempt activity, thereby precluding the right to deduct VAT. Furthermore, there is significant debate regarding the entitlement to deduct VAT on expenses associated with the issuance and acquisition of shares. These matters have been under discussion for many years, and the case law in this area is extensive, diverse, and complex.
In the past, efforts have been made to provide clarity, including a policy ruling from 1991 (referred to as the Holding Resolution) and a policy ruling from 2004 (concerning the VAT levy on the sale of shares). Both decisions will be withdrawn effective July 1, 2025.
With the publication of two new policy rulings (which will come into effect on July 1, 2025), the Secretary of Finance shares his views on developments in case law. These are the following two policy ruling:
The new policy concerning "shares and VAT" is divided into two separate decisions. This news item will outline the key aspects of the new policy as it pertains to "shares and VAT."
In principle, only entrepreneurs are included in the VAT fiscal unity. However, a 1991 policy ruling allowed holdings without entrepreneurial status to be included if they had a steering and policy-determining function. This approval is maintained in the new policy. This requires:
To incorporate this holding into a VAT fiscal unity, a written submission must be made to the Tax Authorities. One can only act as a VAT fiscal unity upon receipt of a decision from the Tax Authorities.
Being part of a VAT fiscal unity offers considerable advantages for holdings, which typically cannot deduct VAT. Inclusion in a VAT fiscal unity allows for VAT deductions, provided the fiscal unity itself holds the right to such deductions. Additionally, services rendered within a VAT fiscal unity are exempt from VAT charges. It is also noteworthy that the new policy explicitly addresses the role of the intermediate holding.
Based on previous policy, some clarity was provided about the right to deduct VAT in relation to shares. This policy will be withdrawn effectively on July 1, 2025.
The first thing that stands out in the new policy is that it only contains guidelines. Approvals are no longer included.
In the structure of the new policy, a distinction is made between the right to deduct VAT and the extent of the right to deduct.
The right to deduct VAT only arises in the following three situations:
This approach is not new, but the new policy provides a more detailed interpretation of these three possibilities.
The new policy elaborates on the extent of the right to deduct VAT when one of the specified conditions is satisfied. This approach is further categorized into the extent of the right to deduct in instances of direct cost attribution and scenarios where direct attribution is not feasible (pro rata).
Regarding the direct attribution of costs, it is observed that VAT is not deductible when the costs are directly related to the sale of shares, as this constitutes a VAT-exempt activity. However, if the shares are sold to a party located outside the EU, VAT becomes deductible. The structure of the new policy, particularly on this topic, clearly defines its scope. There will be an increased emphasis on the non-deductibility of VAT compared to previous policies.
The challenge for practice is to determine what falls under directly attributable costs. This issue is complex and lacks a uniform approach. The new policy does not provide definitive guidelines. It refers to "the objective content and nature of the purchased service" as a guideline for this discussion. Additionally, the new policy distinguishes between costs incurred before and after the sale, but it does not clarify the specific difference or the consequences of this distinction.
If direct attribution of costs is not possible, the pro rata system is used. Applying the pro rata means that the costs are considered general costs and the deduction of VAT is determined by the ratio between VAT-taxed turnover and VAT-exempt turnover. As the sale of shares qualifies as VAT-exempt turnover, this sale significantly impacts the calculation of the pro rata. Although such a sale is typically an incidental transaction, it still affects the pro rata calculation.
The legal system permits the exclusion of this turnover from the pro rata calculation. However, practical experience shows that this was rarely accepted. The new policy suggests that there may be increased flexibility for this approach. The determination of whether a transaction qualifies as incidental will need to be evaluated on an individual basis.
The new policy, effective from July 1, 2025, may result in an increased occurrence of non-deductible VAT on costs related to shares. However, the exact impact remains unclear due to the lack of specific guidelines and clarity on crucial points within the new policy.
If you have any questions about this topic or if you would like to discuss the topic further, please do not hesitate to contact us at info@vatpartners.com
21-02-2025 - This document contains explanatory notes for all transactions subject to the 9% VAT rate on goods and services.
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