This was ruled by the Court of Justice of the European Union (“CJEU”) in the Ryanair case (C-249/17) issued on 17 October 2018.
Facts of the case
Ryanair attempted to acquire a 100% shareholding of Aer Lingus. Although the takeover was unsuccessful, Ryanair sought to recover the entire input VAT on professional advisory fees incurred. Ryanair argued that it intended to provide management services to Aer Lingus, had the takeover been successful. The question arose whether the input VAT on the abort costs could be fully deducted.
The CJEU considered that in order to determine whether VAT on costs is deductible, the reason for the expenditure must be determined. As Ryanair intended to pursue an economic activity with the acquisition of Aer Lingus, namely the supply of VAT taxed management services, the abort costs were incurred for this purpose. Hence, these costs are directly and immediately linked to an economic activity (i.e. the provision of management services). As a result, Ryanair is entitled to deduct VAT on these costs, even though ultimately no management services were provided.
The deduction of VAT on costs incurred in relation to share transactions is often a topic of discussion with various European tax authorities. The Ryanair case confirms the deduction of VAT on costs incurred for the acquisition of shares, provided that the acquiring entity can demonstrate a clear intention to provide VAT taxable services to the target company. The M&A practice is therefore greatly benefitted by this judgment. The judgment may provide arguments for higher deduction of VAT on abort costs in particular for taxpayers generally not entitled to a full deduction of VAT (for example due to VAT exempt financing activities).
If you have any questions please contact one of our advisers of the Loyens & Loeff Indirect Tax team.