A question that often arises when dealing with share transactions is whether the VAT charged by external (sales) advisors to the seller of shares may be deducted by the seller. In order to answer this question it is important to know when the right to deduct VAT exists:
- VAT is entirely deductible when the expenses are only incurred for activities subject to VAT;
- VAT is not deductible when the expenses only relate to activities exempt from VAT; and
- VAT is deductible on a so-called pro rata basis when the expenses relate to activities both subject to VAT and activities exempt from VAT.
The sale of shares is a VAT exempt activity. It follows from the above that VAT due on expenses for advisory services related to the sale of the shares, are in principle not deductible by the seller.
The Dutch Supreme Court ruled on 28 March 2014 that there is an exception to this rule when the advisory services are (also) related to the resignation of the management board and the termination of the management activities. It occurs regularly that the seller of the shares carries (or carried) out management activities for the company being sold. Therefore, it can also occur that the advisory services of the external (sales) advisors does not only concern the share transactions, but also concern the - directly related - resignation of the management board of the company being sold and the termination of the management activities. The content of the instructions given to the external (sales) advisor and the content of the related documents (like an engagement letter, memo's/notes etc.) are essential in this respect, as these serve as guidance in determining the purpose of the advisory services.
If (part of) the advisory services concern(s) the resignation of the management board and/or the termination of the management activities, the VAT on the expenses related to (this part of) the advisory services is fully deductible for the seller. In this context, it may be advisable to draft a separate engagement letter for (this part of) the advisory services and to send/receive separate invoices (related to this part) of the advisory services.