The Federal Tax Court (BFH) issued a decision on 6 May 2010 (case reference V R 29/09) on the right to recover input VAT on transaction costs incurred by a German resident entity in relation to the first time issuance of bearer bonds/coupon bonds.
The tax office in the case argued that no input VAT recovery is possible because the issuance of bearer bonds/coupon bonds must be treated as a VAT-exempt financial transaction, thus precluding recovery of any input VAT. The BFH, however, following the decision of the local tax court, held that a first issue of bearer bonds/coupon bonds is comparable to a first issue of shares in a company to the market or the participation of a new partner against a capital contribution into the company, which is treated as a non-taxable event, following the decisions of the European Court of Justice (ECJ) in the Kretztechnik and KapHag Renditefonds cases. The BFH concluded that if the clear intention of the company issuing the bearer bonds/coupon bonds is to generate capital to secure and strengthen its business, the transaction will be treated like a share capital increase, so that it is irrelevant whether the new capital takes the form of equity or debt for the company.
According to the BFH, the extent to which VAT incurred on transaction costs in relation to the issuing of such bearer bonds/coupons is recoverable as input VAT depends on the overall activities of the company:
- The issuance of the bearer bonds/coupon bonds must serve to strengthen the economic activities of the company, i.e. if the issuance of the bonds only serves non-economic holding activities, recovery of input VAT may be denied (in line with previous ECJ decisions). However, if the issuance serves both economic and non-economic activities, the input VAT to be recovered would have to be apportioned (in line with the 2008 ECJ decision in the Securenta case).
- To the extent the transaction costs incurred are not directly attributable to sales transactions of the company (which is normally the case in a share capital increase or the issuance of bearer bonds), but they have an immediate and direct link to the overall economic activities of the company and the costs are or will become an integral part of the pricing of goods or services sold by the company in its regular economic activities, the input VAT will be recoverable.
- If the economic activities of the company issuing the bearer bonds comprise both VAT-exempt sales (precluding input VAT recovery) and sales that are subject to VAT, the recovery of input VAT will be granted only on the ratio of taxable sales to overall sales.
If you have any questions, please contact Sonja Wiesner or your regular Deloitte indirect tax contact.
