Deduction Of Input VAT On Abort Costs

On 3 May 2018, Advocate General ("AG") Kokott delivered her opinion in the Ryanair case (C-249/17) concerning the deduction of input VAT on costs incurred in relation to an unsuccessful acquisition of a company's entire share capital.

Background

Ryanair, an airline company established in Ireland, intended to take over a competitor, the Irish airline Aer Lingus. The takeover failed due to competition law issues. However, Ryanair requested the deduction of the input VAT on costs related to this failed acquisition, based on the intended economic activity, i.e. the supply of management services to Aer Lingus. Such deduction was rejected by the Irish tax authorities (the Revenue Commissioners) and after initial court proceedings, the case was brought before the High Court which referred the question of the input VAT deduction right for abort costs in a share deal to the European Court of Justice ("ECJ") for a preliminary ruling.

AG's opinion

In order to determine the input VAT deduction right of Ryanair, the AG does not refer to the reasoning of ECJ precedents but adopts a "functional" analysis and looks to the economic context of the intended takeover.

On this basis, beyond the mere acquisition of shares and the intended management activity, Ryanair is undoubtedly engaged in an operational activity as an airline company and it is only in this context that the Irish company envisaged acquiring a competitor, contrary to the situation of a pure holding company.

Therefore, by adopting this functional approach, the AG comes to the conclusion that abort costs in the share deal have a direct and immediate link with the income generated by the operational activity and any related input VAT incurred can be fully deductible.

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