Enterprises struggling with the economic effects of the COVID-19 pandemic might face financial difficulties driving them to carry out share deal transactions. By the wording of the Hungarian VAT Act, such sales qualify as VAT exempt transaction, without the right to deduct input VAT, which implies that general operational expenses (i.e., office rental, management fee, etc.) might be subject to proportional deduction, due to the one-off VAT-exempt revenue emerged from the sales of the shares. The following newsletter tends put a light on this issue.
Pursuant to the Hungarian VAT Act, transactions in shares or interests in companies are exempt from VAT. However, based on the case-law of the European Court of Justice (ECJ) the first step is to ascertain whether the transaction otherwise falls under the scope of VAT. (Therefore, it is not straightforward that the share deal transactions will qualify as VAT-exempt by law and trigger proportioning liability in terms of the input VAT.)
On the basis of the ECJ case-law, the main criterion is whether the share deal transaction in scope will constitute a taxable economic activity from a VAT perspective. The ECJ held that the mere acquisition and sales of the ownership in shares will not qualify as economic activity and therefore will not be subject to VAT, because the nature of such transaction is similar to that of the yield on invested capital, as it is the case for dividends. Nonetheless, share deal may fall within the scope of VAT, where the purpose of the transaction is to secure a direct or indirect involvement in the management of the acquired company, or if the transaction is carried out as a part of trading activity in securities. Likewise, a share deal transaction will be subject to VAT where it is carried out under business-restructuring, provided that the parent company, selling his shares, rendered taxable services to his affiliate, previously. (In those cases, the sale of shares is a measure taken under the reorganization of the parent company’s business activity.)
It is also held by the ECJ, that in cases where the share-deal transaction qualifies as a regular activity by a taxpayer, the VAT-exemption rules will apply, consequently the rules on proportional deduction provided by the Hungarian VAT Act cannot be overlooked.
As far as the proportional deduction is concerned, the Hungarian VAT Act provides the revenue-based proportioning only for cases where other reasonable rating methods are not applicable. (Nevertheless, the Hungarian VAT Act provides waiver from revenue-based proportioning if the purchase price of the shares does not exceed 10% of the total annual revenue of the taxable person.) As for the “other methods”, any reliable method can be taken into consideration which is based upon natural measurements and underpinned by sufficient records (e.g., timesheet-based proportioning). In addition to this, care should be taken on determining the range of involved costs when computing the rate of proportion. It is worth bearing in mind that costs distinctively incurred solely for the purpose of taxable transactions are not subject to proportioning.
All in all, talking about the tax implications of a share-deal is not only the issue of capital gain or loss. The proper VAT treatment is also a considerable point, notwithstanding the sales of shares in a company are generally exempt of VAT.
Please feel free to contact us if you have any questions regarding the above.
Krisztián Vadkerti, partner
Márta Pénzely, adómenedzser
Márton Ráskai, senior adótanácsadó