The taxpayer in this case, Sonaecom, was a holding company that rendered VAT taxed services to some of its subsidiaries. Sonaecom intended to acquire a telecom company, Cabovisão, and in that respect incurred VAT on costs for (i) consultancy services connected with a market study and (ii) banking services connected with securing funding for the intended acquisition. However, the acquisition did not materialize and Sonaecom instead used the funds to provide an interest-bearing loan to its EU based parent company. Since Sonaecom intended to render VAT taxed services to Cabovisão after its acquisition, it fully deducted VAT on the consultancy and banking services that were incurred in this respect. This deduction was challenged by the tax authorities arguing that the costs were not linked to any VAT taxed activities and that therefore VAT deduction was not allowed.
According to the ECJ, a company can deduct VAT on abort costs if the company intended to render VAT taxed services to the target. However, if the abort costs are related to services which are subsequently used by the company in respect of VAT exempt activities, deduction of VAT is not allowed. In the case of Sonaecom, this meant that deduction of VAT incurred in connection with the consultancy services could be maintained. However, deduction of VAT incurred in connection with the banking services had to be corrected. This VAT was eventually not deductible, since the banking services were actually used by Sonaecom to provide an interest bearing loan – a VAT exempt activity.
In this judgment the ECJ confirms the line of its earlier case law in the Ryanair case (C-249/17) allowing VAT deduction on abort costs to the extent that the acquiring company intended to render VAT taxed services to its target. In this case, the ECJ further specifies that if the acquired services are subsequently used in respect of activities which do not allow deduction of VAT – such as VAT exempt or non-taxable activities – the previously claimed deduction of VAT must be corrected. The judgment is – in our view – overall a positive and welcome development as it further cements the notion that VAT on abort costs is deductible if the acquirer intended to render VAT taxed services to the target. This judgment may also offer opportunities to claim deduction of VAT on costs which were initially incurred for VAT exempt (or non-taxable) activities but instead are applied in respect of VAT taxed activities.