By Davide Anghileri, University of Lausanne
Advocate General Kokott of the European Court of Justice has concluded that VAT paid on expenditures related to the acquisition of a company’s entire share capital can be recovered if there is the intention of bringing about a direct, permanent, and necessary extension of the taxable activity of the acquiring company. The fact that the takeover bid failed does not alter this conclusion, the AG said.
The case at stake (C-249/17) relates to costs connected to a bid made by Ryanair to acquire the entire share capital of Irish airlines Aer Lingus.
The takeover failed for reasons of competition law; however, Ryanair had already incurred considerable costs for consultancy and other services in connection with the planned takeover. Hence, the company claimed a deduction of the input tax paid.
EU case-law considers that a deduction of input tax can be claimed for abortive investments; however, the deduction was refused by the Irish tax authorities. The Irish authorities relied on court decisions that hold that the mere acquisition and holding of shares does not constitute economic activity within the meaning of the VAT Directive and therefore the holding company cannot be considered as a taxable person.
The Irish Supreme Court referred the case to the ECJ, asking whether Ryanair’s intention to provide management services to Aer Lingus in the event that the takeover was successful could be considered sufficient to classify Ryanair as a taxable person within the meaning of the VAT Directive and whether an immediate and direct link is necessary for deduction of input tax between the expenditure made in connection with the acquisition of shares in the company and the intended management services.
In her opinion, the AG focused her analysis on the economic reality of the situation. She noted that Ryanair’s situation is different from a pure financial holding company whose sole income consists of dividends which do not constitute remuneration for the economic use of property but are merely the result of ownership of a share.
The AG said that the situation, typical of a pure holding company, in which the supply of taxable management services is virtually a condition for assuming an economic activity, does not exist in cases like that in the main proceedings. In fact, in the case at stake, Ryanair already carries on a commercial activity on the air transport market and generates turnover accordingly, the AG pointed out.
The AG affirmed that the only crucial factor is the intention to commence an economic activity, supported by objective evidence. This applies even if it is already known when the first tax assessment is made that the intended economic activity leading to taxable transactions will not actually be taken up.
Clearly, the fact that the takeover bid actually failed, and no involvement in the management of Aer Lingus was and is therefore also possible, could not result in a subsequent exclusion of the right to deduct input tax.
The AG, in fact, pointed out that although in this instance the takeover of a competitor is intended to be achieved by acquiring shares in the company, the case is much closer to the situation where an undertaking plans to buy up all of a competitor’s physical equipment and facilities than to the situation where an undertaking wishes to purchase shares merely to generate dividends.
Thus, the strategic takeover of an undertaking by which the acquiring company pursues the aim of extending or modifying its operating business is to be regarded as such a direct, permanent, and necessary extension of a taxable activity. Although such a takeover is accompanied by the acquisition of shares in the company, it constitutes a measure aimed at (extended) taxable turnover.
The question of the link between the costs incurred in connection with the acquisition of shares and the intended management services thus no longer arises.
On a functional analysis, it is instead a matter of the link between the acquisition of shares and the (intended) turnover from the operating airline business. With regard to this turnover, there is no disproportion between the value of the deductible input tax and the output transactions, with the result that an allocation is also unnecessary.
Gaining control of Aer Lingus would have been the condition for improving overall business performance and thus for generating the intended output transactions with the parent company and the subsidiary. Such influence on the management of a competitor is possible only if the acquiring company holds the majority of the company’s shares.
Hence, the AG recommended that the Court rule in favor of Ryanair in its challenge against the Irish tax authority’s decision.
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
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