Ryanair Case: Recognition Of A Deduction Right On VAT Incurred By A Holding Company On Broken-Deal Costs

OUR INSIGHTS AT A GLANCE

The Court of Justice of the European Union provided some clarifications on the VAT deduction right of a holding company regarding input VAT borne for the acquisition of shares in a subsidiary in case the share deal is never completed. The CJEU decided that the intention to provide management services to a takeover target is, under certain conditions, sufficient to establish that a potential acquirer is engaged in an economic activity. The CJEU also ruled that input VAT must be considered as fully deductible to the extent the exclusive reason for the expenditure incurred is the intended VAT taxable economic activity. This case law is of prime importance for Luxembourg holding entities. On 17 October 20181, the Court of Justice of the European Union ("CJEU") ruled that VAT incurred by a holding company on costs borne for the acquisition of shares in a subsidiary to which it intends to provide VAT taxable management services is fully deductible, even if ultimately these services are not rendered due to an unsuccessful share deal.

Facts and questions referred to the CJEU

In 2006, Ryanair launched a takeover bid for all the shares of the Irish airline Aer Lingus. In that framework, the airline incurred various advisory costs subject to VAT linked to the planned acquisition. Although the takeover was not fully carried out, Ryanair sought the deduction of the input VAT incurred stating that it was its intention to provide VAT taxable management services to Aer Lingus following the expected share deal.

The tax authority denied the VAT deduction considering the fact that Ryanair did not provide management services in the case at hand. Ryanair brought an appeal to the Supreme Court that referred certain questions to the CJEU.

Decision of the CJEU

As a first step, the CJEU was requested to determine if the intention to provide management services to a takeover target, in the event that the takeover is successful, is sufficient to establish that a potential acquirer is engaged in an economic activity. The CJEU replied in the affirmative, confirming that a company which carries out preparatory acts which are part of a proposed acquisition of shares in another company with the intention of pursuing an economic activity consisting in involvement in the management of that other company by providing management services subject to VAT must be considered a taxable person. Nevertheless, that intention to provide VAT taxable management...