Right to deduct input VAT broken-deal costs

On May 3, 2018, the Advocate General (‘AG’) at the Court of Justice of the European Union (‘CJEU’) issued his Opinion in the Ryanair case. This case concerning broken-deal costs is relevant for Private Equity & M&A practice.

Situation

Ryanair wants to increase their shareholding in Air Lingus from 29% to 100% with the aim increasing the results of Air Lingus by the provision of management services. Ryanair incurred costs with respect to this intended acquisition and deducted the VAT on these costs. Since the acquisition failed, the right to deduct the VAT on these costs has been denied and in that respect preliminary questions are raised.

Opinion

The AG advises the CJEU to judge that VAT on services related to a (failed) acquisition becomes deductible. This view is based on two thoughts. First, the AG indicates that there should be a right to deduct input VAT considering the intention to provide management services against remuneration towards the subsidiary. In this respect it is irrelevant that these management services will not take place due to the failed acquisition as well as that the remuneration from the management services is lower than the amount of broken-deal costs. The AG concludes that the (desired) acquisition concerns a strategic acquisition which has a direct, permanent and necessary link with the VAT taxable activities of Ryanair and based thereon, there exists a right to deduct input VAT on these costs. Ryanair will surely include these costs in their taxed flight prices.

Consequences

This is an important conclusion of the AG. We should await the judgement of the CJEU, but if the CJEU follows the opinion of the AG, this is a favorable judgement for VAT taxable persons intending to increase their (taxable) activities by a strategic acquisition. In that respect a right to deduct input VAT exists, even if the intended acquisition will not take place (broken-deal costs).

Although this case concerns a strategic acquisition, the AG also deals with the situation wherein a holding company has the intention to provide management services to the subsidiary to be acquired. If such a holding company has broken-deal costs, there should -according to the AG- be a right to deduct input VAT as well.