A-G Kokott: right to deduction of VAT in case of failed purchase of participating interest

Recently the Advocate-General (A-G) Kokott of the Court of Justice of the European Union issued an opinion in the Sonaecom case. This case focuses on the question whether a holding company can deduct VAT if the costs are related to a non-executed purchase of shares. It is moreover disputed whether an entrepreneur is entitled to deduct VAT on costs related to an issue of bonds if the capital raised was, ultimately, not used to acquire shares but to provide a loan to a group company. In this news article we discuss the case, as well as its practical importance.

Facts of the case

Sonaecom is a Portuguese holding company that is involved in the acquisition, holding and management of shares with full rights to the resulting income. Sonaecom incurred costs for the acquisition of new shares. The costs are related to (1) the performance of a market survey (hereinafter referred to as: the ‘consultancy services’), and (2) services for the issue of company bonds (hereinafter referred to as: the ‘commission services’). Sonaecom intended to use the capital that was generated by the issue of company bonds for the acquisition of the new shares.

The acquisition of the new shares did, however, not materialise. Sonaecom subsequently lent the capital raised to another group company. Sonaecom deducted the VAT that it incurred on the consultancy and commission services.

Opinion of the Advocate-General

It is disputed whether Sonaecom could deduct the VAT on the consultancy and commission services. With regard to the consultancy services the A-G notes that Sonaecom purchased these services to acquire shares in a new participation and to subsequently provide taxable services to that participation. On the basis of earlier case law of the Court of Justice EU (Ryanair) the A-G reaches the conclusion that, in this case, Sonaecom can deduct the VAT on the consultancy services in full. In this respect the ‘distorted’ ratio between the costs and the expected taxable income is irrelevant.

With regard to the VAT on the commission services the A-G does, however, reach the conclusion that it is not deductible. Namely, Sonaecom did not use the commission services for the intended taxable activities (the acquisition of the new participation to which Sonaecom would perform taxable activities). Instead, the financing costs were used for a VAT exempt activity (the provision of a loan). According to the A-G the actual use prevails over the original intention. Even in the case that Sonaecom would later still use the capital for activities subject to VAT, Sonaecom cannot deduct the VAT on the commission services.

Practical importance

Although the Court of Justice still needs to judge the case, the opinion of the A-G shows that it is extremely important to make the VAT consequences of the acquisition of shares transparent in advance. If it is handled correctly then it is possible to secure the deduction of VAT on purchasing costs.

Equally important is the opinion of the A-G that the actual use of financing costs prevails over the original intended use. If the European court decides to follow the opinion on this point then it shall become even more important to make a clear assessment of the ultimate use of the shares acquired. As the occasion arises, it is recommended to include the VAT consequences of the various options for use in the decision-making.

Do you have questions about this opinion of the A-G or would you like to know more about the VAT consequences of the acquisition of shares? Please contact Mohamed Ameziane (06 52 76 54 14), Govinda Kandhai (06 13 26 03 98) or Erik Claassen (06 11 70 68 05). They are pleased to assist you.