On May 12, 2017 the Supreme Court of Ireland requested the Court of Justice of the European Union (CJEU) to render a preliminary ruling in the Ryanair case (C-249/17). The two questions posed to the CJEU concerned the deductibility of VAT on professional services. Ryanair had purchased these services, because the company wished to acquire shares in its competitor, Aer Lingus. The High Court of Ireland had earlier ruled that the VAT on these professional services could not be deducted, because the takeover attempt had ultimately failed. The outcome in this case could be particularly significant to, for example, private equity firms and the M&A practice within groups.
How will the CJEU rule?
The CJEU could suffice with a reference to its previous conclusions in the Cibo Participations judgment (C-16/00). The Irish court wonders to what extent the VAT on the professional services would be deductible if the takeover had been successful. The CJEU could conclude that it had already ruled on that question before. Although we do not consider it very likely, the CJEU could also reformulate the questions referred for a preliminary ruling so that it can address the situation where a takeover is unsuccessful. In that case, the CJEU could very well leave it up to the national court to examine whether Ryanair holds its (existing) participations as an economic or a non-economic activity within the group.
Current Dutch practice and impact
In the Netherlands, the VAT on professional services can generally also be deducted if a takeover is unsuccessful, provided that there is an objective intention to provide services subject to VAT in respect of that participation. In our view, this intention is present if investigation shows that the acquirer is involved in the management of the other participations already held, or if its policy makes clear that new participations are always added to the existing VAT group. The Dutch tax authorities can thereby require that the intention to perform activities subject to VAT be substantiated with objective data (e.g. draft contracts, minutes of board meetings, remarks made in the financial statements, etc.). If the business can prove this is the case, then our experience is that this position can be maintained in respect of new participations that are to be acquired, even if the transaction does not go ahead. In such cases the deduction is applied in line with the normal deduction entitlement that applies to the taxpayer’s entire business activity. If the acquirer does not yet have a track record for its existing participations, or always holds it participations passively, then the VAT on professional services may appear non-deductible.
What are your options?
The outcome of the Ryanair case (C-249/17) could be particularly significant to, for example, private equity firms and the M&A practice within groups. If you are intending to make acquisitions, then we advise reviewing your VAT position on time. It may be wise in the early stages of an acquisition to objectively substantiate that you intend to perform activities subject to VAT for the intended participation. This will enable you to secure the recovery of input VAT as much as possible, even if the acquisition is unsuccessful.
If you are currently consulting with the Dutch tax authorities and supplementary assessments have been or will be imposed, then we recommend that you file a notice of objection in order to preserve your rights, thereby referring to the Ryanair case (C-249/17). It may in some cases be advisable to await the CJEU ruling in this case. The advisors of Meijburg & Co’s Indirect Tax and M&A Group would be pleased to assist you further with this issue. Feel free to contact one of these tax advisors or your regular contact for more information.