This week saw a number of tax decisions being handed down by the European Court of Justice, and perhaps the most far reaching has to do with input credit for VAT incurred in connection with certain share disposals.

In the case of AB SKF, a parent company (SKF) sold one of its subsidiaries, along with an interest in another group company with a view to raising capital for the group as a whole. SKF wasn't merely a holding company, but provided various types of management services to the subsidiaries, for which it charged fees and VAT on those fees.

In relation to the share disposals SKF purchased services in the area of “valuation of shares, assistance with negotiations and specialised legal advice for the drafting of the contracts”. The case concerned whether or not, in the circumstances, it could recover VAT it paid on the fees for those services.

The ECJ confirmed the generally accepted wisdom that the sale of shares is an exempt transaction for VAT purposes. However the judges went further, having reference to the business activities of SKF and also it would seem to the purpose of the transaction, which was to raise capital. They concluded that there is a right to recover VAT paid on services supplied for the purposes of a disposal of shares if “there is a direct and immediate link between the costs associated with the input services and the overall economic activities of the taxable person.” This new precept comes with a heavy “case by case” caveat.

The full judgment is available at http://curia.europa.eu