VAT Decree on exempt negotiation in shares

What does this mean for your organization?

If a party is involved in arranging or supporting a share transaction, the question often arises whether this qualifies as a VAT exempt negotiation service. This often applies to corporate finance services.

The Decree does not explicitly state which ambiguities the State Secretary intends to address, which may raise the question whether the VAT exemption is limited to the scenarios as explicitly mentioned in the Decree. Given the wording and the examples in the Decree, it seems likely that this aims to clarify the application of existing VAT case law. In any case, the Decree clarifies that the VAT exemption applies to full support of the process across all phases of the transaction. Parties currently applying a different VAT treatment will have to reconsider this in light of the new Decree. For parties involved in only one or a few phases of the process, it is important to assess the VAT treatment of their services in light of the criteria mentioned in the Decree.

The classification of the services affects the VAT treatment of the (alleged) intermediation service, and it can also influence the amount of the service provider's (pro-rata) right to deduct input VAT. If your organization provides services related to the purchase and sale of shares (directly or as a third party) or uses such services provided by third parties, it is important to timely determine whether the publication of the Decree leads to a different VAT treatmentof these services. If you wish to discuss the Decree or the VAT treatment of such activities, please feel free to contact your usual PwC advisor or the contacts listed at the bottom of this page.

Background

When buying and selling a business or a part thereof through a share transaction, various services are often performed, in which multiple parties may be involved. The VAT classification of such services is not always straightforward. For example, the question arises whether one or more services are involved, and of course, also whether these fall within the scope of the exemption for VAT-exempt intermediation in respect of securities. The distinction between performing this VAT-exempt intermediation and more material or technical services, such as advertising, information provision, or financial advice, is therefore not always easy to make. The European Court of Justice (ECJ) has provided frameworks in various judgments. For example, services may be considered as VAT exempt negotiation services if:

• A buyer/seller is alerted to the opportunity to conclude a contract; or
• Contact is established for the buyer/seller with the other party; or
• Negotiations regarding the details of the agreement are conducted for the buyer/seller, in their name and on their account.

Decree

The new Decree provides guidance on how to determine if a service qualifies as a VAT exempt negotiation service. Firstly, it must be determined whether the service consists of multiple elements, and if so, whether these elements constitute a single (composite) supply or if they are separate services for VAT purposes.

The Decree distinguishes between four different phases of service that encompass the entire purchase and sale process:

1. Orientation and Introduction Phase;
2. Information and Preparation Phase;
3. Negotiation Phase; and
4. Contract Conclusion.

If the service covers all phases, then, based on the Decree, it can be assumed that the service constitutes a VAT-exempt intermediation service. The Decree confirms the practice whereby corporate finance services for the entire acquisition and divestment process are treated as a VAT-exempt service. The fact that the process is interrupted at some point does not, in itself, detract from the service's qualification as VAT-exempt intermediation.

If the agreed service does not cover all the aforementioned phases, then, according to the Decree, a further assessment must be made based on the specific circumstances of the case. If the services are purely material or technical, they do not qualify as a VAT-exempt intermediation service.

The Decree includes the following list of examples of standalone VAT-taxable services:

• An activity consisting solely of providing an information memorandum;
• Advice on the valuation of a company;
• Advice on 'streamlining' a company or assistance in preparing a company for sale ('sale-ready');
• Advice on the acquisition strategy;
• Legal services, such as drafting a (letter of intent) agreement;
• The provision of software and hardware used to automatically match purchase and sale intentions for shares.

Furthermore, the Decree clarifies that outsourcing certain activities to a third party does not preclude the application of the VAT exemption. The party to whom an activity is outsourced can also provide an intermediation service, provided the activity itself aims to bring about an agreement between buyer and seller.

Finally, the Decree states that an activity consisting of bringing together multiple buy and sell orders from third parties concerning securities on stock exchanges also qualifies as a VAT-exempt negotiation service.