Tax alert 28 – Deduction of VAT related to expenses with professional services performed in order to acquire shares of another company and to provide taxable services to the latter

CJEU Decision in the case C-249/17 Ryanair Ltd

On 17 October 2018, the Court of Justice of the European Union (CJEU) issued a judgment in the case of Ryanair Ltd (C-249/17). The case is relevant, in particular for the holding sector, and deals with the conditions for entitlement to deduct the input VAT paid on professional services expenses incurred by a company for the purpose of acquiring the shares of a competing company and its intention to provide the latter with taxable services, after the takeover.

To that end, the CJEU has decided that a company such as the one at issue in the main proceedings must be entitled to deduct the input VAT paid upfront on the costs of consultancy services in the context of a public purchasing offer, even if it has been shown that this economic activity has not been achieved, provided that those expenses were exclusively linked to the expected economic activity.

Facts of the case and Court Decision

During 2006, the Irish airline company Ryanair Ltd launched a public bid on acquiring all the shares of other airlines company. On this occasion, Ryanair Ltd incurred expenses with the provision of advisory services and other services related to the proposed acquisition. For reasons of competition law, the transaction has not been fully performed, so Ryanair Ltd acquired only part of the share capital of the target company.

Subsequently, Ryanair Ltd applied for the deduction of the input VAT paid upstream in relation to those costs, claiming that its intention was to intervene in the management of the target company by providing the latter with taxable administration services.

Since the tax authorities refused that deduction, arguing that VAT could not be deducted from the costs of a transaction that had never generated taxable activities, the case finally arrived at the CJEU, by means of two preliminary questions, as follows:

  • The intention to provide management services to a target company if the takeover is successful is sufficient to establish that the potential buyer is engaged in economic activities?
  • Can there be a sufficient „direct and immediate” link between the professional services offered in the context of a potential takeover and the potential provision of management services to the target company, allowing deduction of the input VAT due for the professional services concerned?

The CJEU largely followed the Opinion of the Advocate General (AG), stating that the professional services were provided to Ryanair Ltd under the condition that, through the proposed acquisition of shares, it intended to carry on an economic activity consisting in the provision of taxable management services to the target company.

Thus, Ryanair Ltd acted as a taxable person at the time of the professional services acquisition and is entitled to benefit of the right to deduct the input VAT on those services, even if the taxable management services were not subsequently carried out. Furthermore, the expenses incurred for the acquisition of the target company’s shares are found to be attributable to the supply of taxable management services which was expected to be performed in the future. Thus, there is a direct and immediate link between these expenses and the whole of non-performed future economic activity.

Therefore, Ryanair Ltd has the right to fully deduct the input VAT on the purchases of professional services carried out on the occasion of the public bid to acquire the other airline.

What is new about the CJEU decision in the Ryanair Ltd case?

Ryanair is the most recent CJEU’s decision in a number of cases in which there have been analyzed aspects of transactions relating to holding companies, such as Case C-320/17 – Marle Participations. The judgment reaffirms the exercise of the right to deduct the input VAT on upstream purchases of goods or services, assuming that the amounts spent for their purchase belong to the elements of the downstream taxable transactions price (CJUEțs decision in Case C-132/16 Iberdrola Inmobiliaria).

Furthermore, that decision provides clarification on the possibilities for deduction of input VAT on the cost with professional services carried out in the context of a public purchasing offer, even if it has been shown that the economic activity has not been carried aut and therefore has not led to taxable transactions.

How we can help

The CJEU’s logic is clear and reflects its already established general direction on this subject. Any potentially affected business needs to critically analyze this decision and determine its impact on the VAT treatment of its service acquisitions and we can support you in this analysis.

 

Author: Ramona Stefan – Tax Manager, Indirect Tax

 

For additional information, please contact:

Alex Milcev, Partner – Head of Tax & Legal

Email: office@ro.ey.com



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