The VAT treatment of share sales in Germany involves specific rules that differ from the general VAT regime for goods and services. Understanding these rules is crucial for businesses and investors engaging in transactions involving the sale of shares. This guide provides an overview of the VAT implications and input tax deduction related to share sales.
VAT Treatment of Share Sales
Exemption from VAT: According to Section 4 No. 8(f) of the German VAT Act (Umsatzsteuergesetz, UStG), the sale of shares is generally exempt from VAT. This means that when a company or individual sells shares, they do not charge VAT on the transaction. The rationale behind this exemption is that share sales are considered financial transactions, which are typically excluded from VAT to avoid complications and double taxation within financial markets.
Key Points:
- No VAT on Share Sales: The seller does not add VAT to the sale price of the shares.
- No Input Tax Deduction: Because the transaction is exempt from VAT, the seller cannot deduct any input VAT related to costs incurred in making the share sale.
Practical Implications:
- Cost Management: Sellers need to manage their costs efficiently, as they cannot reclaim input VAT on expenses directly related to the sale of shares, such as legal and consultancy fees.
- Documentation: Proper documentation is required to substantiate the VAT-exempt status of the transaction and to ensure compliance with tax regulations.
Input Tax Deduction
General Rules for Input Tax Deduction: Under German VAT law, businesses can generally deduct input VAT on goods and services purchased for their taxable activities. However, this right is restricted when it comes to VAT-exempt transactions like share sales.
Conditions for Input Tax Deduction:
- Direct and Indirect Costs: Input VAT can be deducted for goods and services used directly for taxable transactions. For share sales, input VAT related to direct costs cannot be deducted, as the sale is exempt.
- Mixed Use: If a business incurs costs that are used for both taxable and exempt activities, it must apportion the input VAT. Only the portion attributable to taxable activities can be deducted.
Example Scenario: A company incurs legal fees for general advice. If the advice pertains to both VAT-taxable business operations and VAT-exempt share sales, the company must determine the portion of the legal fees related to each activity. Only the input VAT on the portion related to taxable activities is deductible.
Special Considerations for Mergers and Acquisitions
Due Diligence Costs: In mergers and acquisitions (M&A), due diligence costs and other related expenses can be substantial. Since these costs are often incurred to facilitate the sale of shares, they are typically non-deductible under the VAT exemption for share sales.
Example Clause: “Legal and advisory fees incurred during the due diligence process for the acquisition of Company X’s shares are not eligible for input tax deduction, as the transaction falls under the VAT exemption per Section 4 No. 8(f) UStG.”
Practical Tips for Compliance
- Consult Tax Advisors: Engage with VAT experts to navigate the complexities of input VAT deduction and ensure compliance with German VAT regulations.
- Accurate Documentation: Maintain detailed records of all expenses and their purposes to substantiate input VAT claims and to ensure proper apportionment between taxable and exempt activities.
- Cost Allocation: Carefully allocate costs related to mixed-use activities to maximize input VAT deduction where possible and comply with the rules for VAT-exempt transactions.
Role of WW+KN and Baker Tilly
WW+KN, a Baker Tilly Company, offers comprehensive support for businesses dealing with VAT and input tax deduction issues related to share sales. Our services include:
- Consultation: Providing expert advice on VAT implications of share sales and related transactions.
- Documentation Review: Ensuring that all necessary documentation is accurate and compliant with VAT regulations.
- Legal Representation: Baker Tilly Legal provides specialized legal support in tax law, protecting your business interests during complex financial transactions.
WW+KN acts as a single point of contact, integrating tax and legal expertise to deliver comprehensive service. For professional assistance, contact us at info@vat-germany.com. We help you navigate the complexities of VAT compliance, ensuring your business operations in Germany are conducted efficiently and in full compliance with tax regulations.