OUR INSIGHTS AT A GLANCE
- The Court of Justice of the European Union provided some clarifications on the VAT deduction right of a holding company regarding input VAT borne for the acquisition of shares in a subsidiary in case the share deal is never completed.
- The CJEU decided that the intention to provide management services to a takeover target is, under certain conditions, sufficient to establish that a potential acquirer is engaged in an economic activity.
- The CJEU also ruled that input VAT must be considered as fully deductible to the extent the exclusive reason for the expenditure incurred is the intended VAT taxable economic activity.
- This case law is of prime importance for Luxembourg holding entities.
On 17 October 20181, the Court of Justice of the European Union ("CJEU") ruled that VAT incurred by a holding company on costs borne for the acquisition of shares in a subsidiary to which it intends to provide VAT taxable management services is fully deductible, even if ultimately these services are not rendered due to an unsuccessful share deal.
Facts and questions referred to the CJEU
In 2006, Ryanair launched a takeover bid for all the shares of the Irish airline Aer Lingus. In that framework, the airline incurred various advisory costs subject to VAT linked to the planned acquisition. Although the takeover was not fully carried out, Ryanair sought the deduction of the input VAT incurred stating that it was its intention to provide VAT taxable management services to Aer Lingus following the expected share deal.
The tax authority denied the VAT deduction considering the fact that Ryanair did not provide management services in the case at hand. Ryanair brought an appeal to the Supreme Court that referred certain questions to the CJEU.
Decision of the CJEU
As a first step, the CJEU was requested to determine if the intention to provide management services to a takeover target, in the event that the takeover is successful, is sufficient to establish that a potential acquirer is engaged in an economic activity. The CJEU replied in the affirmative, confirming that a company which carries out preparatory acts which are part of a proposed acquisition of shares in another company with the intention of pursuing an economic activity consisting in involvement in the management of that other company by providing management services subject to VAT must be considered a taxable person. Nevertheless, that intention to provide VAT taxable management services has to be confirmed by objective elements.
The subsequent question aimed at determining whether the input VAT incurred by a potential acquirer on services received for the purposes of seeking to progress the relevant acquisition can be considered as linked with the future VAT taxable management services and therefore as being deductible.
The CJEU ruled that Ryanair is entitled to deduct input VAT even if there is no direct and immediate link between the services received and output transactions giving rise to deduction to the extent that the costs of the services in question are deemed to be part of its general costs and are, as such, components of the price of the goods or services which it supplies. Therefore, such acquisition costs do have a direct and immediate link with the taxable person's economic activity as a whole and input VAT must be considered as fully deductible to the extent the exclusive reason for the expenditure incurred must be found in the intended VAT taxable economic activity, namely the provision of management services subject to VAT to the target company.
The CJEU nevertheless highlighted that in the event that the expenditure is attributed in part also to an exempt or non-economic activity, VAT paid on that expenditure may only be deducted in part.
Impacts of that decision on the Luxembourg practice
The Ryanair case is of prime importance for Private Equity and M&A businesses. The deduction of input VAT incurred in the framework of share transactions is a complex topic where the views of taxpayers and VAT authorities can differ. In many cases, the VAT authorities tend to consider that input VAT is not (fully) recoverable as related to activities not granting a VAT deduction right (notably holding of shares and EU financing).
In light of the Ryanair case, utmost attention should be paid to the following elements in order to justify a VAT deduction right in case of broken-deal:
- documentation should be properly and carefully drafted in order to reflect the objective intention to provide management services subject to VAT;
- the VAT deduction right should be easier to justify if it is the practice of the holding company to provide VAT taxable management services to all its subsidiaries. Such a group practice eases to demonstrate the "objective intention" on which the VAT deduction is assessed;
- alongside to management services, many Luxembourg holding companies perform also financing activities (EU financing does not grant an input VAT deduction right unlike management services). As already mentioned by the CJEU, performing transactions not subject to VAT could jeopardize a full VAT deduction right on the acquisition costs.
It is the right moment to reassess the VAT deduction methodology used by holding companies and to adopt a robust VAT strategy built notably on the basis of the CJEU cases. If you intend to make acquisitions, the VAT aspects should be thoroughly analyzed in the early stages.
1 CJEU, 17 October 2018, Ryanair Ltd v. The Revenue Commissioners, C-249/17, ECLI:EU:C:2018:834
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