Ryanair: VAT recovery on costs related to (failed) share transactions?
Questions are referred to the CJEU in the Ryanair case concerning the deductibility of VAT related to professional fees paid in relation to a failed takeover bid.
20 juli 2017
On May 12, 2017, the Irish Supreme Court referred preliminary questions to the European Court of Justice (“CJEU”) in the Ryanair case (C-249/17) concerning the deductibility of VAT related to professional fees paid by Ryanair in relation to the failed takeover bid for Aer Lingus in 2006. The outcome in this case may be of great importance to private equity companies and M&A practice.
Ryanair is an airline dedicated to providing low-budget airline-services in Europe. The 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 related to the aforementioned professional fees paid by Ryanair. Ryanair sought to claim the VAT paid on professional fees 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 refers the following questions to the CJEU to resolve the matter:
- Can a future intention to provide management services to a takeover target, in the event that the takeover is successful, be sufficient to establish that the potential acquirer is engaged in economic activity so that VAT charged to the potential acquirer on goods or services provided for the purposes of seeking to progress the relevant acquisition can potentially be considered as VAT on an input to the intended economic activity of providing such management services; and
- Can there be a sufficient “direct and immediate link”, as identified as a requirement by the CJEU in Cibo Participations, between professional services rendered in the context of such a potential takeover and output, being the potential provision of management to the acquisition target in the event that the takeover is successful, so as to permit a deduction to be made in respect of the VAT payable on those professional services?
Consequences for the Dutch practice
We would expect that the CJEU, based on its judgments not only in Cibo Participations and Rompelman as mentioned to in referred case, but also in INZO and Ghent Coal, will allow the deduction of input VAT on the grounds that granting input deduction cannot depend on whether a particular venture is successful or not. If the CJEU would rule contrary that would involve a major impact both for dealings in shares but possibly also for unsuccessful acquisitions of other types of assets.
Considering the above, for now, we feel that in practice the Ryanair case should not have an impact on the Dutch VAT position of concerning (holding) companies. The case does however provide another illustration of the discussions around VAT recovery in relation to M&A transactions. We advise businesses to monitor their positions closely and in cases similar to Ryanair to obtain sufficient evidence on the intention to perform VAT taxable activities.