Background Case law

The VAT treatment of share transactions has historically been a complex issue particularly for taxpayers in terms of whether VAT can be recovered on related costs. The issues surrounding VAT recovery on share transactions has led to litigation both in the domestic courts of the Member States and the Court of Justice of European Union (the “ECJ”). Revenue has sought to interpret any case law permitting VAT recovery on share transactions narrowly and challenged VAT recovery where the fact pattern in a particular transaction does not replicate the facts of the cases decided by the ECJ.

The significant issues involve the VAT treatment of holding companies and whether VAT incurred by such companies is recoverable.

The volume of case law both at the level of the ECJ and in the Member States national courts is substantial and some key themes have emerged. The key issue in deciding whether the VAT incurred is recoverable is whether the costs incurred form a component part of the taxpayer’s output transactions.

VAT Analysis

Most relevant case law includes the following:

• Polysar (Case C-60/90): Passive holding companies are not considered to be in business therefore cannot avail of VAT recovery on costs.
• Cibo (Case C-16/00 ): A Holding Company that actively manages a target company in which it owns shares can recover VAT incurred on acquisition costs.
• Kretztechnik (Case C-465/03): If costs are not related to a specific economic activity VAT can be recovered as a general overhead provided the costs relate to taxable supplies.
• UK Case BAA Ltd: This case provided an outline of the requirements to be met before VAT is recoverable on share acquisition costs. This is a UK case and is therefore not binding on the Irish Revenue.
• Securenta (Case C-437/06): The acquisition costs of a holding company should be split between its taxable management service and its non-taxable holding company function.
• AB SKF (Case C-29/08): VAT on acquisition costs can be recovered if they are included in the price of the vatable output transactions.
• Ryanair (Irish High Court): The costs incurred on the attempted Aer Lingus takeover could not be recovered as Ryanair did not take any steps or do any act towards the provision of management services as the takeover bid was ultimately unsuccessful.

It should be noted that Irish legislation and guidance is very limited therefore binding ECJ decisions are important.

Recharge of costs as part of the management fee

Costs recharged to a passive holding company

If the costs of the acquisition are recharged to a passive holding company, the VAT incurred cannot be recovered in this entity. This is on the basis that in EU case law (Polysar) that the mere holding of shares does not constitute an economic activity and therefore the costs incurred by such companies cannot be recovered.

Cost recharged to a trading company

If the costs of acquisition are recharged as part of a management fee to companies which have full VAT recovery the VAT incurred as part of the management fee should be recoverable based on the company’s overall VAT recovery position. As a consequence VAT should not be an absolute cost. Following the Cibo case Revenue accept that these downstream costs are recoverable when recharged from a subsidiary.

In some cases the costs of acquisition of a company will be recharged by way of the management fee to entities that were not involved in the original transaction. Therefore ostensibly the costs do not relate to some of the group member’s taxable supplies. Case law has not determined that the costs must be recharged in a specific way nor is it prescriptive about how a company calculates its service fee, only that the costs relate to the company’s management of its subsidiaries and therefore are an element of the price charged.

The ECJ in Cibo decided the costs do not have to be directly recharged only that they have a direct and immediate link to the supply as a whole. It appears that the management fee charged can be recovered by the group subsidiary even if it includes the acquisition costs of a different entity.

Costs recharged to companies within a VAT Group

Under VAT legislation where the costs are recharged to companies within a VAT group VAT does not apply. It has been argued by Revenue that such costs cannot be a component element of the output VAT on the basis that VAT is not charged, however it is clear from the Kretztechnik decision that where costs are incurred which relate to transactions which are outside the scope of VAT, the VAT incurred can be recovered on the basis of the general VAT recovery of the person provided the costs form a component part of the output tax.

In the case of Abbey National Plc (Case C-408/98). Revenue and Customs in the UK sought to restrict VAT credit incurred by Abbey National when it was disposing of part of its property letting business as a transfer of a business on the basis that the transfer was not a supply of goods. The European Court disagreed and opined that the VAT incurred can be recovered in full. In paragraph 35 of that judgment, the court stated,

• “However, the costs of those services form part of the taxable person’s overheads, and as such are cost components of a product of a business. Even in the case of a transfer of the totality of assets, where the taxable person no longer effects transactions after using those services, their costs must be regarded as part of the economic activity of the business as a whole before the transfer.”

The court went on to state,

• “so if the various services acquired by the transferor in order to effect the transfer of a totality of assets or part thereof have a direct and immediate link with a clearly defined part of his economic activities, so that the costs of these services form part of the overheads of that part of the business, and all the transactions relating to that part are subject to VAT, he may deduct all the VAT charged on his costs of acquiring those services.”

If the costs relate to the output transactions they are recoverable as general overheads even if there is no direct supply. When a VAT group is formed all the members taken together become a single taxable person. Therefore while the costs may be recharged internally the costs will form part of the group company’s output tax.

More recently the Advocate General (“AG”) Mengozzi recently issued an opinion on Beteiligungsgesellschaft Larentia + Minerva mbH & Co. KG (“Larentia+Minerva”). The AG in his opinion makes it clear that, where a company actively manages its subsidiaries, the VAT costs associated with raising capital to acquire those subsidiaries and in actually going on to acquire them, is recoverable in full. An apportionment will only need to be made if a number of subsidiaries are acquired and only some of them will be actively managed. AG Mengozzi also notes that, under the normal partial exemption rules, the holding company would not be able to recover VAT which relates to exempt supplies.

The AG appears to be of the view that if the holding company is VAT grouped with the subsidiaries it acquires, this choice effectively defeats the intention to make taxable supplies (as supplies between members of a VAT group are disregarded) and precludes recovery of VAT on costs. However, there is some scope for an alternative analysis, as a further paragraph of the judgment reconfirms that, as members of a VAT group are deemed to be a single taxable person, recovery of VAT by the VAT group should be based on the activities of the group as a whole.

It is important to note that the ECJ is not obliged to follow AG Mengozzi’s opinion, but elements of the AG’s Opinion are encouraging, however until the decision is handed down, there continues to be much uncertainty in this area. Active holding companies which have not recovered VAT on corporate acquisition costs should immediately consider protective claims pending the final ECJ judgment expected later this year.

Jarlath O’Keefe is Head of Indirect Tax with Grant Thornton.

Email: jaralth.okeefe@ie.gt.com

T(direct) + 353 (0)1 680 5817

Lorcan O’Rourke is VAT Assistant Manager with Grant Thornton.

Email: Lorcan.ORourke@ie.gt.com

T(direct) + 353 (0)1 436 6477