Ryanair: A-G Kokott concludes that VAT recovery on costs related to (aborted) share transactions is possible
On May 3, 2018, Advocate General Kokott (the “A-G”) delivered her opinion in the Irish case of Ryanair Ltd (C-249/17) regarding the deductibility of VAT related to professional fees paid by Ryanair on the aborted takeover of Aer Lingus. The outcome in this case may be of importance to the M&A practice.
4 May 2018
Ryanair - an airline – made a bid to take over another airline, Aer Lingus, in 2006. Ryanair had the intention of making Aer Lingus more profitable by bringing its expertise and experience by providing VAT taxable management services to Aer Lingus.
The case concerns the deductibility of VAT on professional fees paid by Ryanair. Ryanair sought to claim this VAT on advice received in relation to the takeover bid as an input deduction. This gave rise to a question concerning one of the qualifying requirements specified in the CJEU judgment in Cibo Participations (C-16/00) which requires that in order for a right to deduct, “the goods or services purchased must have a direct and immediate link with the output transactions in respect of which VAT is deductible”.
The CJEU precedent set in the Cibo Participations case established that the purchase of shares by a holding company for the purposes of engaging in an economic activity consisting of the provision of management and other like services to its subsidiaries constitutes an economic activity, which in principle entitles the company to recover input VAT incurred. In the CJEU Rompelman case (C-268/83) the CJEU held that initial investment activity which predated the carrying out of taxable supplies also constituted economic activity in itself and qualified for input VAT deduction if the intended activity was subject to VAT.
There was a finding of fact in the Irish courts that Ryanair’s intention was to be an active participant in Aer Lingus and intended to provide taxable management services to Aer Lingus if its bid was successful. The High Court surprisingly held that the deduction of input VAT was not available on the basis that the bid was unsuccessful and no taxable supplies were made by Ryanair.
The Irish Supreme Court referred questions to the CJEU to resolve the matter and now the A-G has released her opinion.
Opinion A-G Kokott
A-G Kokott concluded that – in the context of a strategic takeover by an operating undertaking – the acquisition of a company’s entire share capital with the intention of bringing about a direct, permanent and necessary extension of the taxable activity of the acquiring company constitutes an economic activity. Furthermore, costs incurred by the acquiring company in connection with achieving such a strategic takeover have a direct and immediate link with its taxable activity. That the acquisition ultimately did not proceed and therefore the intended VAT taxable activities are not performed, do not impact the VAT recovery position. As a result, the VAT paid on professional fees is to be deducted in accordance with that activity, i.e. the costs qualify as general costs and VAT is recoverable based on the pro rata ratio.
The aforementioned overall conclusion of A-G Kokott is positive for operating (holding) companies with the intention to perform a (strategic) takeover. She also notes that “not every holding of shares in the case of a taxable person can necessarily lead to a non-economic activity alongside the operating business, as this is not compatible with the principle that VAT should be neutral”, which is a good sign.
Several interesting remarks have been made by A-G Kokott that we would like to bring to your attention.
The A-G also seems to allow VAT recovery had the costs been incurred by a pure holding company, thus without an operating business, in case such holding company would have the intention to perform (management) services to the target company after the takeover. She confirms that the acquisition and holding of shares by a holding company do constitute an economic activity, if the shareholding is accompanied by performing (management) services to the target company against remuneration. The A-G concludes that a right to reclaim input VAT also exists for costs made in preparation for an economic activity. In this respect the A-G takes the view that the only crucial factor is the intention to commence an economic activity for VAT purposes, supported by objective evidence. This applies even if it is already known, when the first tax assessment is made, that the intended economic activity leading to taxable transactions will not actually be taken up.
If there is an (intention to) provide (management services, the CJEU’s case-law makes it possible for (financial) holding companies to claim a (potentially) large input VAT deduction on costs regarding the acquisition of shares, whereas there would only be limited (management) service turnover. If at all, in case of an aborted deal of course. This may result in a significant disproportion between input VAT and output VAT. For that reason, the European Commission expressly proposed in the proceedings that input VAT deduction be permitted in connection with the acquisition of shares only if proportionate to the management services. In the Netherlands, the Den Bosch Court of Appeal has also expressed a – more or less - similar view in its judgment of 9 January 2015, nr. 14-00560, ECLI:NL:GHSHE:2015:14. The A-G however expressly dismissed the aforementioned position of the Commission. As a result, a right to reclaim VAT on costs related to an acquisition should exist, provided that the (intended) acquisition and holding of shares constitutes an economic activity.
The opinion of A-G Kokott is a positive one in relation to aborted M&A deals, although we have to wait and see whether the CJEU will follow the opinion in its judgment. Obviously, we will keep you updated on the pending case. If you have any questions about the above, please contact your VAT advisor.
In the meantime, we advise both financial as well as operating holding companies to obtain sufficient evidence on the intention to perform VAT taxable activities, as the importance of such evidence follows once more from the current opinion.