CJEU allows VAT recovery on costs related to aborted share transactions has been saved
CJEU allows VAT recovery on costs related to aborted share transactions
Ryanair Case (C-249/17)
Further to our article reporting on AG Kokott’s opinion in our previous edition of Indirect Tax Matters, the Court of Justice of the European Union (CJEU) delivered its judgment in the Ryanair Case (C-249/17) on 17 October 2018.
In brief, this case saw the Irish Supreme Court asking the CJEU to confirm whether a company, that intends acquiring all the shares of another company in order to provide VATable management services to the latter company, will be entitled to deduct input VAT incurred on the professional costs incurred in the context of a takeover bid, even if the transaction is aborted and ultimately the taxable supply of management services is not carried out.
The CJEU echoed AG Kokott’s opinion by confirming that a right to full input VAT recovery exists in this case, with the costs incurred being seen to have a direct and immediate link with the proposed economic activities. It was confirmed that Ryanair had the intention to render VATable supplies and that all of the activity carried out with a view to making those supplies was economic activity carried out in pursuit of taxable supplies which qualified for VAT input deduction. This was found to be the case, notwithstanding the fact that the taxable management services were ultimately not carried out. Of note also was that even though the Court held that the costs of acquisition were general costs of the business that they did not relate in any part to the acquisition and holding of the shares in Aer Lingus. Had that been the case the Court would not have been able to indicate that full input deduction was available to Ryanair.
By deciding in favour of Ryanair this CJEU decision has brought welcome clarity to the VAT recovery position for all businesses that have incurred costs on aborted takeover bids. With a view to preserving a VAT recovery entitlement on future M&A activity, it is essential that businesses adequately document their economic activity intentions from the outset by way of, for example, draft management service agreements, business plans or minutes of board meetings. The key would be ensuring that any VATable activities intended to be provided post-acquisition are clearly documented to support claims for input VAT recovery on costs associated with proposed acquisitions, even if the acquisition ultimately is unsuccessful. Substantiation of VATable intentions regarding contemplated activity should safeguard the right to input VAT recovery, which could otherwise have a significant financial impact for businesses.