Written by: Økland
On 29 September 2017, the Supreme Court issued a ruling in case 2017-1831-A concerning the entitlement to deduct value-added tax for advisory services in connection with the purchase of shares. The full ruling can be read here.
Skårer Syd Holding AS, a holding company that did not conduct operations that were liable for value-added tax and therefore was not registered in the value-added tax register, acquired all shares in Tunveien Eiendom AS. This business rented out buildings for commercial activities that were liable to pay value-added tax and held a voluntary registration in the value-added tax register. Following the share acquisition, Skårer Syd Holding AS became voluntarily and jointly registered together with Tunveien Eiendom AS and another subsidiary. Skårer Syd Holding AS subsequently deducted value-added tax from the invoices from advisers engaged in connection with the acquisition of the shares in Tunveien Eiendom AS. After an inspection of the tax assessment, the Eastern Norway Tax Office decided to reverse input taxes and charged Skårer Syd Holding AS an additional tax of 20%.
The main rule pursuant to Section 8-1 of the Value-added Tax Act is that a “registered tax subject is entitled to deduct input value-added tax in the procurement of services and goods for use in the registered business”.
This means that business activities consisting of the rental of buildings and that are voluntarily registered in the value-added tax register have a right to deduct input value-added tax on goods and services for use in the business. Input value-added tax on services consisting only of advice in connection with the turnover of shares and other financial transactions is not deductible, as such activities are not liable for value-added tax. Business activities relating to financial services, including the acquisition and sale of shares and securities, are also not grounds for voluntary registration, unlike the rental of real estate property to businesses that are liable for value-added tax. Furthermore, previous case law states that the right to deduct input value-added tax requires the procurement of goods or services to be relevant to and have a sufficiently natural and close link to the liable party’s own liable business activities.
Like the District Court, the Supreme Court found that input value-added tax could not be deducted, as the advice had not benefited the liable rental business and also did not have any close or natural link to this business activity. As such, this ruling is not innovative but justified by the fact that the Court of Appeals reached a different outcome than previous decisions from the Supreme Court, including the Telenor ruling in Rt. 2015, page 652. The ruling is therefore a clarification and specification of the rules that the right to deductions must have a relevant link with the liable part of the activities conducted by a business. In addition to the link requirement, there is also a correspondence requirement, i.e. the cost to which input value-added tax is linked must apply to the liable part of the business activities.
Joint registration “softens” this correspondence requirement somewhat. This means that input tax on procurements in a jointly registered business may be deducted even if it is used in the liable part of another of the jointly registered businesses. But the turnover of shares does not belong to the liable part.
The Supreme Court therefore determined that the joint registration with Tunveien Eiendom AS did not change the link requirement and that the rules concerning tax assessment reversal in Section 8-6 of the Value-added Tax Act also do not apply. The ruling did not deviate from previous Supreme Court case law in these areas either but is a clarification and specification.
There could be difficult borderline areas, e.g. in connection with the reorganisation of businesses for which consultancy services are required to assess various aspects of a reorganisation process. In such cases, we recommend obtaining binding prior statements from the Tax Administration before consultants do more than outline the topics for assessment and options that must be clarified. This had not been done by Skårer Syd Holding AS. The Supreme Court therefore held that the terms for imposing an additional tax had also been met. It was deemed negligent on the part of Skårer Syd Holding AS not to have taken the initiative to clarify the regulations in advance.