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If you are contemplating on sale of shares or buying (part of) a business, it is important to get a clear understanding of your VAT position first. Whether VAT must be calculated on the sale price and whether the seller or the buyer have a right to deduct VAT on the costs associated with the sale (such as fees paid to accountants or consultancy firms) all depends on the facts and circumstances of the sale. With the right considerations in mind, it is sometimes possible to safeguard the right to deduct VAT on related costs made by the seller or buyer. We take you through some considerations below.
Selling (part of) a business can either be done by selling shares or by selling the assets themselves (including stock, client contacts, goodwill and the like). Both ways have different consequences for the VAT treatment of the sale.
The VAT treatment is relevant to determine whether VAT should be calculated on the sale price and whether a right to deduct VAT exists for the selling and buying companies in relation to any costs made in relation to the sale. Take for example the sale below, for which both BV A and BV B made costs that include VAT by hiring consultancy firms in or to smoothen their deal.
If BV A sells shares to BV B, no VAT should be calculated on the sale price. Depending on the circumstances, the sale can either be ‘exempted from VAT’ or entirely excluded from the VAT system. The difference is relevant in two way. First, and most importantly, it is relevant in determining whether BV A can deduct the VAT it paid on the consultancy fee. Second, more formally, it determines whether BV A should put “exempted from VAT / btw vrijgesteld” on its invoice and put it in its VAT return or not.
Only when the sale of shares is deemed ‘exempted from VAT’, a right to deduct VAT might exist for the selling party on costs made related to the sale.
When BV A sells shares in a company it holds to BV B, the sale is VAT exempt only when BV A performed VAT taxable activities to the subsidiary (such as management activities for which a fee containing VAT was being paid), when selling shares is part of the regular business activity of BV A or when the sale can be seen as a necessary extension of its taxable activities. All other sales of shares are out of scope of the VAT system and therefore in principle exclude any possibility of deducting VAT for the seller.
After determining that the share sale is VAT exempt, the next step is to determine whether the costs on which VAT was calculated are directly linked to the sale of the shares – and for example have been taken into account into the price of the shares – or whether these costs have been made in the more general business activity of the company. Only in the latter case, a right to deduct VAT exists, insofar the business activity on a whole consists of taxable activities. An important exception to the aforementioned is when the buyer of the shares is located outside of the European Union (EU). In that case, any VAT on the costs related to the sale can be deducted in full.
Picture 2: Can BV A deduct the VAT on the consultancy fee when selling shares in BV X?
In case the buyer is not located outside the EU.
The purchase of shares is always out of scope for VAT for the buyer. A right to deduct VAT on costs that the buyer has made in relation to the purchase exists only when the buying party will (or aims to) provide taxable services (such as management activities) to the subsidiary from the moment of acquisition onwards.
VAT should in principle be calculated on the sale of assets, albeit all normal VAT rules regarding rate and exemptions apply (such as that the sale of immovable property is usually exempted from VAT). VAT is to be calculated on the sale price, thus in principle also on goodwill. However, the VAT treatment of goodwill ultimately follows that which it sees on.
When VAT is calculated on the sale of assets, normal VAT rules apply regarding deduction for the seller and the buyer. This means that a right to deduct the VAT on costs associated with the sale exists insofar these costs are made with regard to VAT taxable activities.
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The sale of shares or assets can both also be deemed a ‘transfer of a totality of assets’. In that case, the sale is disregarded for VAT purposes and both the buyer and seller can deduct the VAT on their costs related to the sale, to the extent that they are entitled to a VAT deduction.
A transfer of a totality of assets is automatically assumed by the Dutch Tax Authorities when certain conditions have been met. This is especially important when selling assets, as this can mean that VAT was unrightfully added to an invoice and consequently unrightfully deducted by the buyer. On the other hand, managing to meet the criteria can also result in safeguarding the right to VAT deduction on costs by the seller that was otherwise lost.
A sale is assumed to have been a transfer of a totality of assets when a business, or an independently functioning part thereof, is transferred to a purchaser that is able and aiming to continue the business in the same manner. The purchaser of the assets is then deemed to carry on the VAT position of the seller in respect of the transferred business. This means that ongoing VAT revision periods, options for rent subject to VAT, and specific agreements with the tax authorities with respect to the transferred assets (if any) are continued by the purchaser.
It can be difficult to determine whether the undertaking is capable of carrying on the transferor’s economic activity. For example, a bar that is sold without its alcohol license cannot be deemed a transfer of a totality of assets as the assets together, including the real estate, the inventory, the client lists and the like, cannot continue the transferor’s economic activity.
As can be seen from the above, it can be difficult to determine whether VAT has to be calculated on the sale of (part of) a business or whether VAT on the costs relating to the sale can be deducted by the buyer or seller. In case you doubt the sale has not been done correctly, we can see if we can help you minimize the damage from VAT perspective. If you want to see how you can safeguard the right to deduct VAT, we can explore options together.
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