Attribution of input VAT on an aborted takeover

The ECJ has ignored the opinion of the Advocate General in Ryanair v The Revenue Commissioners (Case C-249-17) (ECJ, 17 October 2018) in favour of a more straightforward positive answer to the question whether a company seeking to acquire a target with a view to providing management services may deduct input VAT on associated expenses even where the acquisition is aborted.

The Advocate General (Kokott) had suggested that a narrow focus on whether the acquirer would provide management services to the target was inappropriate in a case where the acquirer is an operating company seeking to acquire a target with a view to strategically expanding its business. Instead, a broader functional analysis was required to determine whether the costs incurred would constitute cost components of the acquired business in the future.

The decision of the ECJ makes no mention of the approach suggested by the Advocate General and, instead, follows the well-trodden path of earlier judgments relating to an acquirer intending to provide management services, confirming the fact that the intended acquisition does not take place is no barrier to input VAT recovery.

Background

In 2006 the airline Ryanair made a bid to take over the Irish airline Aer Lingus. Although the takeover failed for reasons of competition law, Ryanair had already incurred considerable costs for consultancy and other services in connection with the planned takeover. Ryanair therefore claimed deduction of the input tax paid, which was refused by the Irish tax authorities. Ryanair appealed and the Irish courts referred the matter to the ECJ.

In particular, the Irish courts sought guidance on the questions:

• can a future intention to provide management services to a takeover target, in the event that the takeover is successful, be sufficient to establish that the potential acquirer is engaged in economic activity for VAT purposes, and
• can there be a sufficient “direct and immediate link” between professional services rendered in the context of such a potential takeover and the potential provision of management to the acquisition target in the event that the takeover is successful, so as to permit an input VAT deduction.

Decision of the ECJ

The ECJ has, perhaps unsurprisingly, answered the questions put to it in the positive. The case law of the court clearly shows that preparatory activities undertaken by a business with a view to commencing making supplies are in themselves an economic activity (Intercommunale voor Zeewaterontzilting (Case C–110/94)). There is also clear authority that recovery of input VAT is not prevented merely due to the fact that the taxable activities contemplated did not actually take place (Ghent Coal Terminal NV (Case C–37/95)).

The ECJ had little problem in applying these principles, combined with its case law on the ability of holding companies to deduct input VAT, to conclude the Ryanair was, in principle, entitled to recover the input VAT it had incurred on the costs on the abortive takeover. Ryanair had planned to make taxable supplies to Aer Lingus following the takeover. Such an activity was clear an economic activity. The preparatory acts taken by Ryanair towards that acquisition were part of that economic activity and, as such, the input VAT incurred in taking those acts was attributable to that planned economic activity. It made no difference that the acquisition did not actually occur.

Advocate General’s opinion

There is no mention in the judgment of the Advocate General opinion, who suggested that a narrow focus on management services was inappropriate in cases such as this. What was really at issue is whether the holding company carried on an economic activity. In this case, it was clear that Ryanair itself did carry on an economic activity of operating a commercial airline business. Moreover, in this case, it was clear that the reason for the intended share acquisition was to expand that commercial airline business. The intended share acquisition was, in function, little different to an intended acquisition of business assets. In such a case as this, therefore, a “functional analysis” showed that there was a clear link between the acquisition of shares and the intended expanded turnover of the business. The expenditure had a “direct and immediate link” with the wider airline business as it would form a cost component of that wider business since the “expenditure made in connection with acquiring the shares of Aer Lingus undoubtedly constitutes components of the cost of the (intended) output transactions from the airline business following the takeover of Aer Lingus”.

Accordingly, the Advocate General opined that, in the context of a strategic takeover, the acquisition of a company’s entire share capital with the intention of thereby bringing about a direct, permanent and necessary extension of the taxable activity of the acquiring company constitutes an economic activity for VAT purposes and costs incurred by the acquiring company in connection with achieving such a strategic takeover have a direct and immediate link with its taxable activities with the result that the VAT paid on that expenditure is to be deducted in accordance with that activity.

Comment

The Advocate General made a convincing case for looking at the wider business of the acquiring company in the context of a company takeover. A narrow focus on the provision of management services in such a context leads to the potentially irrational consequences (pointed out by the Commission in its submissions), whereas a focus on the wider business of the acquirer provides a much broader basis for deduction.

Does the failure of the ECJ to address this approach imply rejection of it? Not necessarily. The fact remains that the ECJ was able to deal with the particular questions asked of it without recourse to the wider approach suggested by the Advocate General. Had the intention to provide management services not been present, then the alternative approach suggested by the Advocate General would have been clearly in point and the ECJ may have been faced more directly with questions over the extent to which it may be possible to “look through” the immediate share acquisition to the ultimate objective pursued by the taxpayer.

In the meantime, it remains important for a bid vehicle to ensure that there is clear evidence of its intention to provide management services to the target post-acquisition in order to ensure that input VAT associated with the acquisition is deductible.