On 17 October 2018 the Court of Justice of the European Union (‘CJEU’) rendered its decision in the Ryanair case (C-249/17). This decision handles the issue of input VAT recovery for costs in connection with unsuccessful share deals (broken-deal costs). Below we will highlight the importance of this decision for practice, more in particular Private Equity and M&A in general.
The facts of the case are as follows: Ryanair wanted to increase its shareholding in Air Lingus from 29% to 100% with the aim to increase the results of Air Lingus by the provision of management services by Ryanair. Ryanair incurred costs with respect to this intended acquisition and deducted all VAT on these costs. However, the deal failed due to reasons of competition law and the right to deduct the VAT on these costs was denied by the Irish tax authorities. This discussion was referred by the Irish Supreme Court European Court of Justice.
Advocate-General Kokott already accepted input VAT recovery in her opinion. The Court follows this opinion by simply referring to the fact that Ryanair had the intention to actively manage Air Lingus. As there is sufficient proof of this intention, input VAT recovery for the broken-deal costs should be allowed.
Consequences for the Dutch practice
This is once again an important decision from the Court for holding companies, and more in particular for the Private Equity and M&A sector. As far as there is sufficient proof of the intention to actively manage a target company accompanied by services against remuneration , input VAT recovery should be allowed on the deal costs, notwithstanding the fact that the deal is finally cancelled. This decision actually combines settled EU case law on the intention to start undertaking VAT taxable activities and case law on input VAT recovery by active holdings. As such, this case law significantly improves the VAT position of active holdings.
It should be emphasized that the Ryanair case handles an unsuccessful deal for the acquisition of a company. Please note that another interesting case is pending before the European Court regarding input VAT recovery on due diligence costs in connection with in unsuccessful sale of shares in a company
(C&D Foods, C-502/17). Advocate General Kokott already rendered her opinion in this case, which is less favorable for businesses. Notwithstanding the fact that the portfolio company was actively managed by the holding company, input VAT recovery is denied because there is a direct link between these costs and the VAT exempt sale of shares. Previous case law (AB SKF) had opened more possibilities for such input VAT recovery, which the Advocate General now seems to close. It is to be seen if and how the Court will follow this opinion.
The Atlas/Tiberghien VAT team have sufficient expertise in this complex VAT matter. Please contact us should you have questions or should you need assistance for input VAT recovery in connection with successful or unsuccessful share deals.