InRyanair v HMRC (Case C-249/17) (17 October), the CJEU found that VAT incurred on costs relating to a partially aborted company acquisition was recoverable, in circumstances where it had been intended that the holding company would provide taxable management services to its newly acquired subsidiary.
Ryanair had launched a takeover bid for all the shares of another airline (‘Target’) and had incurred input tax in relation to expenditure on professional services. However, because of competition issues, Ryanair had only been able to acquire part of the share capital of Target. Ryanair had sought to deduct the relevant input tax on the basis that it had intended to get involved in the management of Target by providing taxable management services, but the deduction had been denied by the Irish tax authorities.
The CJEU observed that the mere holding of shares in a company does not constitute an economic activity, unless it is accompanied by the supply of management services subject to VAT (Larentia + Minerva and Marenave (Case C-108/14)). The court added that since an economic activity can consist of several consecutive transactions, preparatory acts must themselves be treated as constituting an economic activity. This means that any trader with the intention, as confirmed by ‘objective elements’, of independently starting an economic activity, and which incurs the initial investment expenditure for those purposes must be regarded as a taxable person.
The court concluded that a company which carries out preparatory acts as part of a proposed acquisition of shares in another company, with the intention of pursuing an economic activity consisting in providing management services, is a taxable person. In addition, the principle of neutrality requires that the first investment expenditure incurred for the purposes of, and with the view to, commencing a business is an economic activity. Any other interpretation would burden the trader with the cost of VAT in the course of his economic activity without allowing him to deduct it. The court added that the right to deduct subsists even if the intended economic activity is not carried out (INZO (Case C-110/94)).
Finally, the court accepted that the existence of a direct and immediate link between an input transaction and an output transaction is a condition to the right to deduct but it noted that a taxable person also has a right to deduct in the absence of such a direct and immediate link where the cost of the relevant services forms part of general costs so that the relevant services have a direct and immediate link with the taxable person’s economic activity as a whole.
Why it matters: This decision takes the principle established in Larentia + Minerva a step further; a holding company can recover VAT on acquisition costs not only it is subsequently involved in the management of its subsidiary but also if the acquisition is (partially) aborted, as long as it was intended that the holding company would provide taxable management services.
InRyanair v HMRC (Case C-249/17) (17 October), the CJEU found that VAT incurred on costs relating to a partially aborted company acquisition was recoverable, in circumstances where it had been intended that the holding company would provide taxable management services to its newly acquired subsidiary.
Ryanair had launched a takeover bid for all the shares of another airline (‘Target’) and had incurred input tax in relation to expenditure on professional services. However, because of competition issues, Ryanair had only been able to acquire part of the share capital of Target. Ryanair had sought to deduct the relevant input tax on the basis that it had intended to get involved in the management of Target by providing taxable management services, but the deduction had been denied by the Irish tax authorities.
The CJEU observed that the mere holding of shares in a company does not constitute an economic activity, unless it is accompanied by the supply of management services subject to VAT (Larentia + Minerva and Marenave (Case C-108/14)). The court added that since an economic activity can consist of several consecutive transactions, preparatory acts must themselves be treated as constituting an economic activity. This means that any trader with the intention, as confirmed by ‘objective elements’, of independently starting an economic activity, and which incurs the initial investment expenditure for those purposes must be regarded as a taxable person.
The court concluded that a company which carries out preparatory acts as part of a proposed acquisition of shares in another company, with the intention of pursuing an economic activity consisting in providing management services, is a taxable person. In addition, the principle of neutrality requires that the first investment expenditure incurred for the purposes of, and with the view to, commencing a business is an economic activity. Any other interpretation would burden the trader with the cost of VAT in the course of his economic activity without allowing him to deduct it. The court added that the right to deduct subsists even if the intended economic activity is not carried out (INZO (Case C-110/94)).
Finally, the court accepted that the existence of a direct and immediate link between an input transaction and an output transaction is a condition to the right to deduct but it noted that a taxable person also has a right to deduct in the absence of such a direct and immediate link where the cost of the relevant services forms part of general costs so that the relevant services have a direct and immediate link with the taxable person’s economic activity as a whole.
Why it matters: This decision takes the principle established in Larentia + Minerva a step further; a holding company can recover VAT on acquisition costs not only it is subsequently involved in the management of its subsidiary but also if the acquisition is (partially) aborted, as long as it was intended that the holding company would provide taxable management services.
