Deduction of input VAT on consultancy costs

by Ebba Perman Borg, Victor Elovsson and Maria Ström


Meeting discussion

On 26 September 2023, the Swedish Supreme Administrative Court (“HFD”) published its ruling (case no. 1041–1043‑22) on the right to deduct input VAT for consultancy costs in connection with the divestment of subsidiary shares.

A company has the right to deduct input VAT if the input transaction has a direct and immediate link with a taxable output transaction, or with the company’s overall economic activities. A parent company’s acquisition, holding, and divestment of subsidiaries is in itself not considered taxable economic activity. However, a parent company that is actively taking part in the management of a subsidiary may be considered to conduct taxable economic activity. Even though divestment of shares in itself is not taxable, input VAT relating to consultancy costs in connection with a sale of such subsidiary shares may be deductible, provided that the divestment is linked to the overall economic activities of the parent company.

In the case at hand, a parent company whose only business was the provision of management services to its Swedish subsidiaries, divested one of its subsidiaries in connection with a restructuring. The Swedish Tax Agency did not allow deduction of input VAT relating to consultancy costs, arguing that the costs had a direct and immediate link to the divestment of shares, rather than the overall activities of the parent company.

HFD initially stated that the provision of management services by the parent company was taxable economic activity. Further, with reference to applicable case law, HFD noted that a divestment of subsidiary shares has been considered linked to a parent company’s overall economic activities when the divestment was aimed at streamlining the parent company’s operations and free up capital for the remaining taxable activities. HFD then stated, with respect to the case at hand, that there were no grounds for differentiating the right to deduction of input VAT based on the type of economic activity that a taxable person is conducting. Further, the purpose of the divestment of the subsidiary shares was to streamline and increase sales within the remaining business and to provide a capital injection to the group. The parent company had also stated that the profit from the divestment had been allocated to the company’s head office function. It was also noted that, due to the method through which the divestment took place, the consultancy costs could not be passed on to the purchasers, and it must therefore be assumed that the costs were included in the price of the services that the company provided to its subsidiaries.

Therefore, according to HFD, the consultancy costs had a direct and immediate connection with the parent company’s overall economic activities, and not the divestment of subsidiary shares itself. As such, input VAT was deductible. However, HFD referred the case back to the Administrative Court of Appeal to assess whether deductibility of input VAT should be prorated to the taxable business.

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