Non-Monetary Contributions to Companies Back in the Spotlight (Application of VAT in Barter Transactions)

In the case at hand, the company P. increased its capital several times by acquiring real estates from companies W. and B. The consideration for these non-monetary contributions corresponded to the shares issued by P. According to the agreements, the shares were valued at their issue value which was based on the appraisal of the contributed realestates. Companies W. and B. subsequently issued VAT invoices to company P. which claimed a VAT deduction. The tax administrator did not want to recognize the full deduction for company P. arguing that the tax base should have been determined at the nominal value of the shares.

The Czech VAT Act considers non-monetary contributions, if the contributor applied a VAT deduction when acquiring the asset, as a deemed supply of goods for consideration (in the case of tangible assets) or a deemed supply of services for consideration (in the case of intangible assets). This approach has long been the subject of debate as the Czech VAT Act generally considers nonmonetary contributions to be transactions without remuneration where the ’remuneration’ is assigned to the transaction by fiction. This fact is associated with a number of interpretive uncertainties, for example regarding the place of supply, the possibility of applying VAT exemption when contributing real estate and ultimately the possibility of claiming VAT deductions by the recipient of the contribution. In this respect, the Ruling is extremely useful as the CJEU unequivocally considers the non-monetary contribution, for which the contributor receives shares, to be a standard transaction for a remuneration (not a deemed transaction). In such a case, there is no doubt that the general rules regarding the place of supply or VAT exemption should be applied.

However, in other areas of VAT, the Ruling raises more questions than it answers. The CJEU assessed the situation as a barter transaction, where the method of determining the tax base is particularly noteworthy. In accordance with the agreements of the involved parties, the CJEU confirmed the determination of the tax base at the issue value of the shares received by the contributor as consideration and not, as expected, at the value of the asset given up by the contributor. There is no doubt that the Ruling will be the subject of extensive interpretative disputes in this matter.

In the case of barter transactions, the tax base is generally based on a specific rule according to which the value of what is received as consideration is determined by the value of what is given up. The value of the goods given up will, under certain circumstances, be defined as the cost value. However, this rule is not applied in specific cases such as when the subject of the exchange is theprovision of goods at a discount (i.e., offering a discount) on the condition of receiving anotherservice. In these cases, we look for the value of the alternative monetary payment that would normály be provided for the given performance. The key in this specific situation is to answer the question of how much the specific recipient would pay the supplier for the given performance if the payment were made in money.

The CJEU’s argumentation in the Ruling is problematic as it does not build on its previous decisions in a fully comprehensible manner. In the commented Ruling, the CJEU emphasized the agreement of the companies that the consideration would consist of the allocation of shares at a specific issue price and therefore this price must be taken into account. The CJEU thus confirmed that the sought subjective value corresponds to the monetary value that companies W. and B. assigned to the shares of company P. in the agreement.

The CJEU therefore did not determine the tax base at the level of the real estate that was contributed to the share capital but rather based it on the value of the consideration received. We can only speculate whether this creates a new rule and, if so, when it should be applied. It may be important that the subject of the contribution is not only tangible or intangible assets but also monetary amounts, as was the case in the discussed matter. Such an explanation is unlikely, as the CJEU confirmed that shares were consideration exclusively for the real estate. Should therefore the Ruling be applied in all cases where the consideration received by the contractual parties is monetarily valued in the contractual terms? The answer to this question will need to be clarified.

In any case, this instance once again confirms that the procedure according to the Czech VAT Act will very often lead to results that may not be in line with the VAT Directive. The issue of non-monetary contributions and the determination of the tax base in barter transactions are very complex topics.

If you are unsure in a specific case, our VAT specialists are happy to offer you assistance in this matter.

Author: Petr Drahoš, Senior Tax Manager