VAT deduction for “transaction costs” incurred by mixed holding companies

The Court of Justice of the European Union confirms VAT deductibility even if the purchase of shares is unsuccessful, provided there is an intention to carry out an economic activity subject to VAT. On the other hand, the deduction is not allowed if this intention changes and the mixed holding company carries out exempt services

Prepared by Alessia Zanatto, Davide Accorsi and Barbara Luchetti

In its judgment of 12 November 2020 in Case C-42/19 (Sonaecom SGPS SA), the Court of Justice of the European Union, following the principles expressed in its previous judgment of 17 October 2018 in Case C-249/17 (Ryanair Ltd), intervened on the deductibility of VAT for the so-called “transaction costs” relating to consultancy services received by a mixed holding company for the purpose of acquiring shares in a company.

In particular, the case at issue in the judgment concerns Sonaecom SGPS SA, a Portuguese company which, in parallel with its non-economic activity as a holding company, consisting of holding shares in other companies, provides, for consideration, technical and management services to those companies. In that context, Sonaecom SGPS SA purchased consultancy services consisting of a market study for the acquisition of shares in a telecommunications operator to which Sonaecom intended to provide management services subject to VAT. The acquisition was not concluded in the end.

In this respect, the Court recalled that:

  • a company whose sole object is the acquisition of shares in other companies, without interfering directly or indirectly in the management of the latter, does not have the status of a VAT taxable person, nor the right to deduct VAT; and
  • a mixed holding company, which not only holds shares in companies but also provides services for consideration, subject to VAT, to some of those companies, is, in that respect, a taxable person who enjoys a (proportional) right to deduct input VAT.

Furthermore, while referring to the national court the task of verifying whether Sonaecom SGPS SA had the intention, in the context of the planned acquisition of a company, to carry on an economic activity consisting in providing it with management services subject to VAT, the Court confirmed in the present judgment that a mixed holding company may exercise the right to deduct input VAT on consultancy services relating to a market study carried out with a view to the acquisition of shares, even if that acquisition was unsuccessful.

In particular, according to the Court of Justice of the European Union, the right to deduct VAT paid on consultancy services for the purchase of shares is recognised according to the principle of the direct and immediate link that must exist between upstream and downstream transactions, without being affected by the fact that the share purchase transaction has not taken place in the end.

Moreover, according to the constant jurisprudence of the Court, if the costs relating to consultancy services are included among the Company’s general expenses and, as such, are constitutive elements of the price of the goods or services it provides, they confer the right to deduction of the VAT paid.

It follows that, to the extent that a holding company incurs expenses related to the acquisition of shares in subsidiaries to which it supplies, or intends to supply, taxable services, the latter carries out an economic activity and, therefore, has the right to deduct VAT paid on such expenses.

Moreover, in the same judgment, the Court of Justice of the European Union ruled on the deductibility of VAT relating to the costs incurred by Sonaecom SGPS SA in organising and arranging a bond loan to make certain investments, in the event that such investments did not take place and the capital obtained through such bond loan was fully paid to the group’s parent company in the form of a loan.

The judges stress that an approach whereby the right to deduct input VAT paid is based solely on the taxable person’s willingness to use the goods and services purchased, and not on their actual use, would risk undermining the functioning of the VAT system.

Therefore, Sonaecom SGPS SA is not entitled to deduct VAT, as the Portuguese company used the purchased services to make a VAT exempt loan.

In fact, the direct link between the expenses made by Sonaecom SGPS SA for the bond loan and the loan made to the parent company prevails over the initial intention to provide taxable services to a subsidiary to be acquired with the capital obtained through the bond loan.

Let’s Talk

For a deeper discussion, please contact:

Alessia Angela Zanatto

PwC TLS Avvocati e Commercialisti

VAT – Associate Partner

Davide Accorsi

PwC TLS Avvocati e Commercialisti

VAT – Director