With respect to the sale of shares in the target, several parties were engaged including an US M&A advisor. The engagement with the M&A adviser describes a wide range of service covering the preparation and facilitation of the sale of shares. The M&A advisor reached out to potential purchasers and assisted with the negotiations. The fee is mainly dependent on a successful sale (success fee). In advertisements, the M&A adviser describes itself as 'advisor'. The preliminary research was outsourced to other service providers.

The question was whether the M&A adviser's total package of services was taxed with VAT as regular advisory services or exempt from VAT as ‘intermediary services with respect to share transactions’. In addition, the question was raised whether the target was allowed to deduct VAT on other disposal costs.

Judgment of the District Court

The Court ruled that for the application of the VAT exemption for intermediary services in connection with share transactions, it is of importance whether the activities of the M&A advisor were aimed at achieving a successful share transaction. Since the services provided by the M&A advisor were aimed at bringing parties together, the Court held that the services qualified as intermediation. The fact that M&A advisor markets itself as 'advisor' is irrelevant in this respect.

The Court further ruled that for the other costs in relation to the disposal of the target was in the interest of both the target and its former shareholders. The acquisition of the target by the purchaser allowed the target to further grow its business, while the old shareholder has a financial interest in the disposal. The target was therefore allowed to deduct 50% of the VAT on other disposal costs.

Implications in practice

The VAT treatment of services in M&A transactions is an important point of attention. In many cases, the party who engaged the service suppliers cannot deduct VAT on costs and therefore this non-deductible VAT constitutes an actual cost. It is thus beneficial to procure services exempt from VAT. The services provided by the US M&A advisor seems to be common for these types of M&A transactions. For both M&A advisors and their clients, this court ruling provides concrete guidance for applying the exemption. An M&A advisor that provides VAT exempt intermediary services does not have a right to deduct VAT on its costs.

With respect to the second question in relation to the VAT deduction by the target, the Court ruled that the target could deduct half of the VAT on disposal costs. The reason being that the share transaction was in the interest and for the benefit of the target itself. In practice, this is often a topic of discussion.

It is still unclear whether the Dutch tax authorities will appeal against the Court decision.