The Ryanair ruling

Right to deduct VAT also possible for costs incurred during the purchase of shares, if the purchase ultimately does not (fully) go ahead

The European Court of Justice recently confirmed that VAT on costs incurred during the purchase of shares may be deductible even if the purchase ultimately does not (fully) go ahead. As such, the Court of Justice has upheld the principle that the preparatory transactions to an economic activity may also give rise to a right of deduction. At the same time, it has also been upheld that such a right to deduct costs incurred in the context of share purchases only exists if there is a direct and immediate connection with a taxed economic activity or the general costs of the economic activity.

The Ryanair ruling
The facts of the ruling can be summarised as follows. The well-known airline Ryanair had made a public offer for all the shares of another airline during the course of 2006. Ryanair's intention was to provide (taxed) management services to the acquired company following the acquisition. Due to competition reasons, not all of the shares could be acquired, only 29% of them. In the context of the planned acquisition, Ryanair incurred costs, among other things for consultancy services. Ryanair wanted to deduct the VAT charged on these consultancy services, which the tax authorities rejected. In this context, the Court of Justice was asked whether a company is entitled to deduct VAT on the costs incurred with a view to acquiring all the shares in a company, to which, following the takeover, taxed management services would be provided, even if it has been established that this activity has not materialised.

The Court responded to this question in the affirmative. It confirmed that preparatory transactions must also be included in the economic activity, meaning that a right of deduction consequently exists if these actions are the result of a (planned) activity which is subject to VAT. The planned activity at Ryanair which was subject to VAT consisted of providing management services to the acquired company. The Court also recalls the methodology contained in previous case law, on the basis of which, specifically with regard to the purchase of shares, it must be assessed whether such a right of deduction exists on the part of the buyer.

Passive or active holding company?
For example, the Court reiterated that, in principle, a holding company is not subject to VAT ('passive holding company'), unless it is directly or indirectly involved in the management of its subsidiary(s) ('active holding company'). To this end, it is required that the involvement is accompanied by transactions which are subject to VAT.

It has already been judged in previous case law that such involvement may include, inter alia, administrative, accounting, financial, commercial and technical services1, but also VAT-liable rental2 or even a provision of capital if certain conditions are met3. If, on the other hand, the parent company is only involved in the management of its subsidiary without providing additional services, or providing such services but without receiving any fee, it will not perform any VAT-related activity in this respect and will therefore not be subject to VAT.

Right of deduction
In accordance with the general principles of VAT, a holding company will only have a right of deduction if it uses a good or service for its VAT-liable transactions. Given that the right of deduction arises, in principle, when the VAT becomes liable (i.e. when the goods or services are supplied), it can therefore be exercised before the VAT-liable transaction is actually carried out. In the Ryanair ruling, the Court confirmed in this respect that, once the right has arisen, it is retained even if the planned activity has not materialised and has therefore ultimately not resulted in transactions which are subject to VAT, or if circumstances beyond the control of the taxable entity have meant that goods and/or services could not be used for taxable transactions.

Moreover, a right of deduction exists only to the extent that there is a direct and immediate link between the purchase of goods and/or services for which a person wishes to exercise the right of deduction, and one or more transactions at a later stage for which the right of deduction exists. This assumes that the costs incurred are included at an earlier stage in the price of the products which are sold at a later stage. However, the Court also accepted4 that the taxable entity also has a right of deduction even if the costs in question form part of the general costs of the latter, since the general costs are deemed to be directly and immediately linked to the whole economic activity and, as such, are included in the price of all the company's products.

For example, the Court judged that costs incurred in order to strengthen the general economic activity of the company were general costs. In this case, these were costs incurred in the context of a sale of shares (following an initial public offering) in order to strengthen the capital of the company5. To the extent that certain expenses would have been incurred in any case, regardless of whether or not the parent company performs taxable transactions for the subsidiary, these expenses cannot be the direct result of the economic activity of the parent company, and are not deemed to be linked to transactions giving rise to a right of deduction6

In the case of Ryanair, the Court judged that the costs incurred in purchasing the shares were indeed incurred in the context of a (planned) economic activity (the provision of management services) and consequently formed part of the general costs of this activity. As such, Ryanair has a right of deduction for the VAT levied on the costs which were incurred in the context of a planned takeover, when Ryanair intended to perform taxed transactions on the company taken over.

Although it has already been upheld in previous rulings that preparatory activities may also give rise to a right of deduction, the Ryanair ruling also applies this principle to the costs incurred during the purchase of shares. The same condition remains applicable in this context, namely that a right of deduction is only authorised to the extent that the costs incurred during the purchase of shares can be linked to a taxable transaction. This ruling only upholds the fact that this right of deduction also exists as regards preparatory transactions performed with the intention of carrying out an economic activity. Whether or not this economic activity takes place at a later stage is irrelevant. As such, when a holding company incurs costs for the purchase (or sale) of shares, it should be assessed whether these costs can be linked to a (planned) specific economic activity (e.g. the provision of management services to the subsidiary) or can be seen as general costs. The fact that the planned economic activity does not materialise, in whole or in part, does not preclude this right of deduction.

[1] Ruling C-16/00, Cibo Participations SA
[2] Ruling C-320/17, Marle Participations SARL
[3] Ruling C-142/99, Floridienne SA & Berginvest SA
[4] Ruling C-98/98, Midland Bank plc.; Ruling C-169/04 Abbey National plc.
[5] Ruling C-465/03, Kretztechnik AG
[6] Ruling C-502/17, C&D Foods Acquisition ApS. Similarly to the Ryanair ruling, the planned sale of shares did not materialise, which does not prevent a possible right of deduction in this case either, were it not for the fact that the costs incurred did not relate to an economic activity.

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