The Swedish Tax Agency’s view of deduction of VAT in conjunction with the sale of subsidiaries

The Tax Agency has presented a position paper describing their view of the right of deduction of VAT on costs incurred on the sale of subsidiaries. This should be seen in the context of the Supreme Administrative Court’s (HFD’s) decision in the Svea Skog case, which we have previously reported upon. This new view on behalf of the Tax Agency changes its previous position in this matter.

According to the position paper, the starting point in assessing the VAT treatment upon the sale of shares in subsidiaries is that the costs arising in conjunction with such sales are related to sales which are exempt from VAT. If a company can evidence that the costs in question should be deemed as overhead costs pertaining to its business operations, the right of deduction can, on the other hand, apply. This requires that the objective purpose of the sale is to be assessed. A vague, unclear and indirect relationship between the sale of the shares and the business operations is not sufficient in this context.

According to the Tax Agency’s view, the right of deduction exists only in those cases the sale of shares has taken place in conjunction with a restructuring which aims at improving the effectiveness of the operations and at freeing up capital for the owner company’s own, remaining operations, which exist separately and independently of the shareholding and which are independent of any participation in the administration of other subsidiaries. Furthermore, there is a requirement that the company can evidence the purpose of the sale on the basis of objective circumstances.

According to the Tax Agency, there exists, however, no right of deduction in the following situations:

• A holding company sells a subsidiary with the aim of freeing up capital for another subsidiary’s VAT liable operations,
• A holding company which has no other operations other than the provision of management functions, sells one of its subsidiaries,
• Holding companies using proceeds from the sale of shares to distribute dividends to owners.

Comments

The position paper is, in principle, a result of the Svea Skog decision in which HFD granted deduction for a company who had undertaken a sale of shares where they could evidence that the specific sale in question freed up capital to be utilized in the VAT liable operations which the company undertook independently and separately from its ownership of shares in the divested subsidiary.

The Tax Agency’s interpretation of this decision is that the deduction of VAT on costs in conjunction with a sale of a subsidiary can only be granted on the basis of the same, or very similar, premises as those found in the Svea Skog decision. With this new view, the possibilities for right of deduction of VAT on costs in conjunction with the sale of shares has increased compared with the Tax Agency’s previous position.

However, the position paper raises a number of questions, amongst other things, as regards the grounds on which the holding company lacks right of deduction in the above-stated situations. Furthermore, one can question as to how a company is to be able to evidence that the proceeds from a given sale of shares in a subsidiary are used in the remaining VAT-liable operations. A company undertaking a sale of shares in order to utilise the proceeds in the remaining VAT liable operations might also make a dividend payment to its owners during that particular year.

We recommend that companies incurring costs in conjunction with the sale of subsidiaries continue to treat this matter as follows:

• If the company has made no previous claim for deduction but can evidence that there is a relationship between the receipt of proceeds from the sale and the remaining VAT-liable operations, the company should claim deduction for input VAT on the actual costs incurred. It should be expected that the evidence provided for such a relationship is this context will be closely examined by the Tax Agency and a request for reconsideration should be openly stated in the tax return.
• The company should then, in the future, be able to deduct VAT on costs incurred in conjunction with a sale where there is a relationship between the sale and the VAT liable business operations undertaken by the company. However, given the lack of legal clarity in this area, such a claim should be openly stated in the tax return.