At first glance, the sale of shares or equity interests may appear straightforward – such transactions are generally outside the scope of VAT. In reality, however, things are much more complex. While the transfer itself is not subject to VAT, it can have a significant impact on the right to deduct input VAT, defining the boundaries within which holding structures can safely operate. Properly structuring the holding and assessing the nature of related costs often determine whether the company retains or loses its right to deduct VAT.
Sale of Shares and Equity Interests as an Economic Activity
When assessing VAT implications, the key distinction lies between passive ownership of shares or equity interests and active involvement in managing subsidiaries.
If a holding company merely acquires, holds, and subsequently disposes of shares or equity interests, this constitutes a pure investment activity – the management of a portfolio – which is outside the scope of VAT.
The situation changes substantially when the parent company provides its subsidiaries with administrative, accounting, IT, or marketing services that are subject to VAT. In such cases, the sale of shares or equity interests is no longer regarded as passive investment management but rather as an economic activity. According to the case law of the Court of Justice of the European Union (CJEU), this represents a “direct and immediate extension of the taxable activity.”
VAT Exemption for Trading in Shares
An activity may also be regarded as economic when a holding company or other entity actively trades in shares or securities. If such trading can be characterized as a business activity, it is no longer mere passive ownership typical of a traditional holding company. In this case, trading constitutes an economic activity that falls within the scope of VAT but is exempt from VAT under Article 39 of the Slovak VAT Act and the corresponding EU Directive. However, this also means no entitlement to deduct input VAT on related costs.
Deduction of VAT on Transaction Costs
A frequent question in connection with the purchase and sale of shares or equity interests is whether a holding company may deduct input VAT on advisory, legal, or valuation services.
The key test is the direct and immediate link between the expenses incurred and the company’s economic activity.
- If the expenses are directly attributable to a specific share or equity sale transaction that is VAT-exempt, no right to deduct VAT arises.
- If the expenses are part of the general overhead costs – such as due diligence or strategic advisory – that are incorporated into the prices of services provided to subsidiaries, the input VAT may be deducted.
This approach reflects the principle of VAT neutrality, which grants taxpayers the right to deduct input VAT on purchases related to taxable activities.
A landmark decision in this respect is CJEU case C-249/17 (Ryanair Ltd), which confirmed that when a company intends to provide the acquired subsidiary with management or administrative services subject to VAT, it is entitled to full deduction of input VAT on consultancy costs – even if the acquisition ultimately does not take place.
How to Structure a Holding from a VAT Perspective
- Decide whether your holding will remain a pure investment vehicle (without the right to deduct VAT) or act as an active service provider (with partial or full deduction entitlement).
- In any sale of shares or equity interests, pay close attention to transaction-related costs and the possibility of VAT deduction, to avoid disputes with the tax authority and the risk of penalties.
- Document your intention to provide subsidiaries with VAT-able services – this documentation may be decisive evidence in the event of a tax audit.
Conclusion
The sale of shares and equity interests is not subject to VAT and generally carries no entitlement to input VAT deduction.
However, the right to deduct VAT on expenses incurred during the acquisition and holding period depends on whether the holding acts as an active service provider to its subsidiaries.
Proper structuring of the holding and thorough documentation of the company’s intentions are therefore essential – otherwise, the tax authority may challenge the VAT deduction and impose additional tax liabilities and penalties.