Brian Keenan Senior Manager Indirect Tax Services

The recent case of Kretztechnik in the European Court of Justice (ECJ) examined the question of entitlement to recover VAT incurred in relation to the issue of shares. Revenue has now clarified its position on this matter in a recent Tax Briefing article.

Although the case of Kretztechnik AG v Finanzamt Linz was decided earlier in 2005 and could almost be classified as 'historic' given the current volume of ECJ cases, it is worth revisiting the decision. The question of entitlement to recover VAT incurred in relation to the issue of shares was examined.

The ECJ held that an issue of shares for the purpose of raising capital is not a supply of services. In relation to the deduction of VAT incurred in relation to the issue of shares, the ECJ held that because the purpose of the share issue is to increase the company’s capital for the benefit of its economic activity in general, the costs form part of the company’s overheads and are cost components of its supplies. Therefore, it followed that a company which makes only taxable transactions is entitled to deduct all the VAT on the expenses and a company which makes taxable and non-taxable transactions is entitled to deduct VAT in accordance with its agreed partial exemption calculation.

In a recent Tax Briefing article Revenue confirmed that they will implement the judgment fully where the circumstances of the Kretztechnik case are replicated. The following is the Revenue’s interpretatrtion of the applicability of the case;

• Deductibility will extend to rights issues but not to bonus issues.
  
• Deductibility will extend to the issue of new bonds or securities where the following circumstances are met;
  
• The reason for the issue was to raise capital for the benefit of the company’s general economic activities
• The costs incurred in acquiring this capital would feed in to the price of the company’s products
• The costs relating to the issue form part of its general overheads and so carry entitlement to deductibility.
  
• Deductibility will also extend to note issues, Eurobonds and similar instruments provided the input transactions have a direct and immediate link with the output transactions giving rise to a right of deduction.
• Deductibility will not be given to VAT incurred on costs relating to mergers & acquisitions when as a result of a merger new shares are issued in the merged company in exchange for existing shares. However Revenue is willing to consider submissions in certain cases.
• Revenue’s view in respect to the VAT treatment of other transactions in shares remains unchanged
  We recommend that if you have incurred VAT in relation to the issue of shares (or the aborted issue of shares), or new bonds or securities for the purpose of raising capital, you should consider submitting a VAT refund claim as soon as possible.