On October 17th 2018, the Court of Justice of the European Union (the “ECJ”) handed down a ruling (C-249/17) confirming the right to deduct, in full, input VAT paid on expenditure incurred in the context of a takeover bid, provided that the exclusive reason for that expenditure was to be found in an intended economic activity, such as the provision of management services, to the target company and notwithstanding the fact that the economic activity was ultimately not carried out as a result of the failure of the takeover. In doing so, the ECJ clarified the meaning of “taxable person” in relation to preparatory acts and of the condition of “a direct and immediate link” within the meaning of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (the “VAT Directive”).
In the case at hand, Ryanair had launched a takeover bid for all the shares of Aer Lingus (the “Target Company”). The takeover failed and Ryanair was only able to acquire part of the shares of the Target Company. Ryanair requested the deduction of input VAT on consultancy services and other services, incurred in connection with the purchase of shares, indicating that it had intended to provide management services subject to VAT to the Target Company. The Irish tax authority refused that deduction and the Irish Supreme Court referred a preliminary reference to the ECJ.
First, the ECJ recalled that for the purposes of the VAT Directive, a company whose sole object is the acquisition and holding of shares does not constitute a taxable person. However, a company, such as Ryanair, which acquires shares in another company with the intention, as established by objective elements, of providing management services subject to VAT to that company must be considered a taxable person. The ECJ also repeated that preparatory acts also constitute economic activity within the meaning of the VAT Directive.
Second, regarding the conditions of the right to deduct, the ECJ recalled that, while said right is integral to the VAT system, it is in principle conditioned upon the existence of a “direct and immediate link” between particular input and output transactions. A taxable person shall nevertheless also have the right to deduct, even where there is no such direct and immediate link, in case the expenses in question are part of the general costs of the taxpayer and are as such components of the price of the goods or services he supplies and linked to his economic activity as a whole. In each case however, the exclusive reason for the expenditure at stake must be found in the (intended) economic activity.
Applying these principles to the facts at hand, the ECJ concluded that Ryanair acted as a taxable person when it intended, through the acquisition of shares in the Target Company, to pursue an economic activity consisting in providing the Target Company with management services subject to VAT. Ryanair should thus be entitled to deduct input VAT, even if, ultimately, the contemplated economic activity was not carried out. The ECJ finally found that the conditions for Ryanair to exercise its right to deduct input VAT were met, as the expenditure had to be regarded as attributable to the performance of the intended economic activity and thus had a direct and immediate link with Ryanair’s economic activity as a whole.