Private Equity and VAT: changes regarding input VAT deduction as of July 2025
Private Equity and VAT: changes regarding input VAT deduction as of July 2025
In an earlier article, you were able to read that the State Secretary of Finance has published an amended decree on VAT deduction.
The decree concerning the tax liability of a VAT-group, which took effect on the same date, also contains relevant paragraphs regarding the entrepreneurship of holding companies and the possibility of being included in a VAT-group, which may also have an impact on the group's right of deduction. Should this apply, we will include it in this article.
The decree on VAT deduction includes specific guidelines on the right to deduct input VAT in share transactions. In this article, we will further describe the impact of these decrees on private equity parties.
It remains important to properly record the intention of the holding company prior to the purchase of shares. Only if the holding company intends to hold the shares economically, the VAT on costs attributable to the purchase possibly can be (partially) deducted. In addition, it remains important in daily practice that costs enter the group at the correct level. The decree on VAT liability in a VAT-group gives some examples of the possibility for a holding company or intermediate holding company to be included in a VAT-group with other group companies, if this is not already possible as a result of an independent entrepreneurship of the holding company. Timing is therefore very important in connection with the right of deduction. We also refer to our earlier article in this regard.
If the costs are directly attributable to a VAT-exempt sale of shares, the VAT on the costs is not eligible for recovery unless the purchaser of the shares is located outside the EU.
If direct attribution is not possible, the costs may qualify as general costs and deduction could be possible based on the pro rata of the holding company or VAT group to which it belongs.
This makes it important for private equity parties to properly record what the costs incurred relate to. After all, if the costs were incurred solely because of an exempt sale of shares, the VAT cannot be deducted.
In principle, the pro rata is calculated on the basis of the ratio of VAT-taxed turnover to total turnover (taxed and exempt turnover). Turnover from incidental financial transactions are not part of the total turnover. Examples are an occasional loan or an occasional sale of shares.
Based on the 2004 decree on VAT related to the sale of shares, the turnover obtained from a share sale could be kept outside the pro rata calculation. This was favorable because the turnover is exempt turnover, so the pro rata would be lower if this turnover had to be included.
As of July 1, 2025, this decree is obsolete. As of July 1, 2025, the sale proceeds can still be kept outside of the pro rata calculation when there is an incidental financial transaction. The State Secretary has given a further explanation of when a transaction qualifies as an incidental financial transaction. This is the case if relatively little use is made of goods and services for mixed use and this transaction is not a core business activity of the entrepreneur.
In any case, however, there is no incidental financial transaction when the entrepreneur trades shares for business purposes on a regular basis or when the entrepreneur, as a participation or investment company or related entity, is involved in private equity investments.
Therefore, for private equity, participation and investment companies, the starting point, according to the Secretary of State, is that as of July 1, 2025, the sale proceeds on the sale of shares to customers inside the EU must be included as exempt sales in a pro rata calculation. This will have a negative impact on the pro rata and thus the right to deduct input tax of these companies in the year of sale.
The decree on VAT deduction contains the views of the Secretary of State. Thus, this does not mean that in the case of private equity, participation and investment companies there cannot be an incidental financial act. In our view, this depends on the specific situation. However, the tax authorities will follow this position. As a result, it is our recommendation for private equity parties to take into account additional limitations on the right to deduct input tax.
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The decree concerning the tax liability of a VAT-group, which took effect on the same date, also contains relevant paragraphs regarding the entrepreneurship of holding companies and the possibility of being included in a VAT-group, which may also have an impact on the group's right of deduction. Should this apply, we will include it in this article.
The decree on VAT deduction includes specific guidelines on the right to deduct input VAT in share transactions. In this article, we will further describe the impact of these decrees on private equity parties.
Acquisition phase
The amended decree provides further clarification as to when the purchase and holding of shares qualifies as an economic activity. This clarification is a codification of existing case law on this subject and does not result in major changes for private equity.It remains important to properly record the intention of the holding company prior to the purchase of shares. Only if the holding company intends to hold the shares economically, the VAT on costs attributable to the purchase possibly can be (partially) deducted. In addition, it remains important in daily practice that costs enter the group at the correct level. The decree on VAT liability in a VAT-group gives some examples of the possibility for a holding company or intermediate holding company to be included in a VAT-group with other group companies, if this is not already possible as a result of an independent entrepreneurship of the holding company. Timing is therefore very important in connection with the right of deduction. We also refer to our earlier article in this regard.
Sales phase
In the amended decree, the State Secretary also provided further guidance on the allocation of costs related to the sale of shares. Based on this allocation, the recovery right is determined.If the costs are directly attributable to a VAT-exempt sale of shares, the VAT on the costs is not eligible for recovery unless the purchaser of the shares is located outside the EU.
If direct attribution is not possible, the costs may qualify as general costs and deduction could be possible based on the pro rata of the holding company or VAT group to which it belongs.
This makes it important for private equity parties to properly record what the costs incurred relate to. After all, if the costs were incurred solely because of an exempt sale of shares, the VAT cannot be deducted.
Pro rata
When a company or VAT-group engages in both VAT-taxed and VAT-exempt activities, costs must be allocated to the company's activities. For costs directly attributable to VAT-taxed activities, the VAT can be deducted in full. When costs are directly attributable to exempt activities, the VAT on these costs cannot be recovered at all. For all other costs, deductions are made on the basis of the pro rata of the company or VAT-group.In principle, the pro rata is calculated on the basis of the ratio of VAT-taxed turnover to total turnover (taxed and exempt turnover). Turnover from incidental financial transactions are not part of the total turnover. Examples are an occasional loan or an occasional sale of shares.
Based on the 2004 decree on VAT related to the sale of shares, the turnover obtained from a share sale could be kept outside the pro rata calculation. This was favorable because the turnover is exempt turnover, so the pro rata would be lower if this turnover had to be included.
As of July 1, 2025, this decree is obsolete. As of July 1, 2025, the sale proceeds can still be kept outside of the pro rata calculation when there is an incidental financial transaction. The State Secretary has given a further explanation of when a transaction qualifies as an incidental financial transaction. This is the case if relatively little use is made of goods and services for mixed use and this transaction is not a core business activity of the entrepreneur.
In any case, however, there is no incidental financial transaction when the entrepreneur trades shares for business purposes on a regular basis or when the entrepreneur, as a participation or investment company or related entity, is involved in private equity investments.
Therefore, for private equity, participation and investment companies, the starting point, according to the Secretary of State, is that as of July 1, 2025, the sale proceeds on the sale of shares to customers inside the EU must be included as exempt sales in a pro rata calculation. This will have a negative impact on the pro rata and thus the right to deduct input tax of these companies in the year of sale.
The decree on VAT deduction contains the views of the Secretary of State. Thus, this does not mean that in the case of private equity, participation and investment companies there cannot be an incidental financial act. In our view, this depends on the specific situation. However, the tax authorities will follow this position. As a result, it is our recommendation for private equity parties to take into account additional limitations on the right to deduct input tax.
Want to know more?
If you are involved in private equity investments and would like to know more about the possible impact on your investment structure or if you are planning to sell or buy shares, we will of course be happy to help you. Please contact our M&A tax team or one of our VAT specialists.Contact
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