On November 12, 2020, the ECJ issued his decision on ECJ C-42/19 (Sonaecom) related to Input VAT deduction on preparatory activities for acquisition of shares and restructuring that did not happen.
Relevant articles in EU VAT law
Article 4 (1) and (2) and Article 17 (1), (2) and (5) of Sixth Council Directive 77/388 / EEC
Summary of the case
A Portuguese referral asking whether VAT can be recovered on advisory fees attributable to market research for the purpose of acquiring shares where the acquisition does not actually take place? Can VAT be recovered on costs incurred in organising a bond loan, taken out with a view to integrating the financial structure of affiliated companies, and which, since those investments failed to materialise, was ultimately transferred to the parent company of the group?
Detailed Facts
- The taxpayer is a Portuguese holding company involved with the acquisition, holding and management of participations.
- In 2015, it wanted to acquire shares in another entity involved with audiovisual entertainment, telephony and internet. The taxpayer had market research performed with a view to the acquisition.
- It also engaged an investment bank to effectuate a bond issue.
- The taxpayer wanted to use the raised capital to acquire the shares in the target entity to subsequently perform services for it in exchange for a fee.
- It fully deducted the VAT charged on the professional services and on the investment banking fee.
- The shares in the target entity were ultimately not acquired. In the meantime, the taxpayer set the raised capital aside by providing an interest-bearing loan to its parent company.
- The Portuguese tax authority argued that the taxpayer should not have deducted the VAT on the professional services and the investment banking fee for two reasons:
- (a) the VAT is attributable to a non-economic activity (the acquisition and management of a participation), and
- (b) the VAT is attributable to a VATexempt activity (a loan to the parent company).
Question
Is it compatible with the deductibility rules laid down in the Sixth VAT Directive, specifically Articles 4(1) and (2) and 17(1), (2) and (5), to deduct tax borne by the appellant, Sonaecom SGPS, in respect of consultancy services connected with a market study commissioned with a view to acquiring shares, where that acquisition did not materialise?
Is it compatible with the deductibility rules laid down in the Sixth VAT Directive, specifically Articles 4(1) and (2) and 17(1), (2) and (5), to deduct tax borne by the appellant, Sonaecom SGPS, in respect of the payment to BCP of a commission for organising and putting together a bond loan, allegedly taken out with a view to integrating the financial structure of its affiliated companies, and which, since those investments failed to materialise, was ultimately transferred to Sonae, SGPS, the parent company of the group?
AG Opinion
(1) Articles 17 and 4 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment are to be interpreted as meaning that a mixed holding company like Sonaecom has the right to full deduction in respect of expenditure for the acquisition of shares in a company to which it intended to supply taxable services. It is for the referring court to determine whether that is the case. The right to deduct also arises if that acquisition ultimately did not materialise and applies irrespective of the amount of VAT payable in respect of the planned services.
(2) The actual exempt transfer of the capital raised from a mixed holding company to the parent company of the group precludes a deduction. The direct link with the exempt service actually provided takes precedence over the original intention to supply taxable services to a subsidiary to be acquired with that capital.
Decision
1) Article 4 (1) and (2) and Article 17 (1), (2) and (5) of Sixth Council Directive 77/388 / EEC of 17 May 1977 on the harmonization of laws Member States relating to turnover taxes – Common system of value added tax: uniform base, must be interpreted as meaning that a mixed holding company whose intervention in the management of its subsidiaries is recurrent is authorized to deduct the value added tax paid upstream on the acquisition of consulting services relating to a market study carried out with a view to the acquisition of shares in another company, including when this acquisition has ultimately not happened.
2) Article 4 (1) and (2) and Article 17 (1), (2) and (5) of Sixth Directive 77/388 must be interpreted as meaning that a mixed holding company whose intervention in the management of its subsidiaries is recurring is not authorized to deduct the value added tax paid upstream on the commission paid to a credit institution for the organization and the assembly of a bond loan which was intended to carry out investments in a specific sector, when these investments have not finally taken place and the capital obtained through this loan has been paid in full to the group’s parent company in the form of a loan.
Source Curia
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