CJEU: entitlement to claim VAT deduction for failed investments
The Court of Justice of the EU dealt with this question in the Ryanair case. In October 2018, the court held that there is an entitlement to reclaim VAT for costs (expenditures) connected with a planned acquisition that eventually did not come about, or more precisely, not all shares were taken over as originally planned.
The case involved airline operator Ryanair, which intended to acquire all shares of another airline. In connection with the planned takeover, Ryanair incurred expenditures for consultancy and related services, i.e. transaction costs. Yet, due to anti-trust regulations, the planned transaction ended up not taking place and Ryanair only acquired a part of the stake in the target company.
Ryanair still claimed a full VAT deduction on the transaction costs. This was challenged by the Irish tax administrator. Ryanair argued that they intended to provide management services to the target and that they therefore could reclaim VAT on related expenses. One of the preliminary questions referred to the CJEU by the Irish Supreme Court was whether the intention to provide management services was sufficient to claim VAT deduction. The Irish court also asked whether there was an immediate and direct link between the costs associated with the planned acquisition and the intended management services.
The opinion on the case was prepared by Advocate General Juliane Kokott, who compiled a rather detailed analysis of CJEU case law on holding companies to date. The CJEU also summarised most of the so far adjudicated principles regarding holding companies’ possible entitlement to reclaim VAT, in particular the necessity to carry out economic activity. An “active” holding may benefit from claiming a VAT deduction on related inputs. On the other hand, the court emphasised that the sole holding of shares and receipt of dividends cannot be regarded as economic activity; such a “passive” holding is not a taxable person and therefore cannot reclaim input VAT.
According to the CJEU, preparatory activities must also be treated as constituting economic activity, as this may consist of several consecutive transactions. Thus any person with the intention, as confirmed by objective elements, of independently starting an economic activity, who incurs the initial investment expenditure for those purposes, must be regarded as a taxable person.
Although the CJEU arrived at the same conclusions as Advocate General Kokott, i.e. that in the case in question an entitlement to VAT deduction did exist, the court’s argumentation was unfortunately not so detailed. However, the court did emphasise that the fact that the contemplated economic activity was ultimately not carried out was not decisive for the entitlement to reclaim VAT paid on the initial expenditures, provided that the exclusive reason for the expenditure was to be found in the intended economic activity.