In 2018, the deduction of VAT on costs related to aborted transactions was confirmed by the Court of Justice of the European Union (CJEU) in a case where the taxpayer intended to acquire all shares in another company and provide VAT taxable (VATable) management services to such company. In that case, the CJEU considered that the activities of the taxpayer to render VATable supplies, amounted to economic activities in pursuit of making taxable supplies allowing for VAT deduction.
In November 2020, the CJEU further specified its thinking when asserting the deduction of VAT in relation to aborted transactions. The Sonaecom case deals with the recovery of VAT incurred on costs related to (i) consultancy services consisting of market research, and (ii) services related to the issuance of bonds, both expenses were incurred with the view to invest and acquire shares in another company, which ultimately did not materialise.
Sonaecom is a mixed holding company that renders strategic management and coordination services to companies operating in the telecommunications market. Sonaecom purchased consultancy services with the intention to acquire the shares in Cabovisão. Furthermore, Sonaecom paid a commission to BCP Investimento for services relating to the placement of a bond in the amount of €150 million ($185.1 million). The intention of Sonaecom was to use the capital raised following the bond placement to acquire Cabovisão and further invest in triple-play technology. Ultimately, the acquisition of shares in Cabovisão did not materialise, as a result of which Sonaecom decided to use the capital to provide a loan to its parent company based in the EU.
The CJEU first discussed the recovery of VAT on costs relating to consultancy services which were purchased as part of the intended acquisition of Cabovisão. The CJEU ruled that the consultancy services at issue were purchased in the context of Sonaecom’s intended acquisition of a company and that Sonaecom intended to carry out VATable management services for that company. Thus, these costs are part of Sonaecom’s general costs and, therefore, Sonaecom is entitled to deduct VAT on the consultancy services in accordance with its pro rata.
The CJEU continued with the analysis of the recovery of the VAT paid on the commission paid for the bond placement with the view of making investments, where those investments ultimately did not take place and the capital raised was paid to Sonaecom’s parent company in the form of a loan. According to the CJEU, the deduction of VAT paid must correspond as precisely as possible to the actual use of the goods and services purchased. Consequently, an actual use of goods and services takes precedence over the initial intention.
The services purchased by Sonaecom are not considered part of its general costs but instead are considered to be directly related to the loan that Sonaecom provided to its parent company. Contrary to the consultancy costs, the CJEU neglected the intended investments and linked the costs for the bond placement to the VAT exempted loan and referred to the actual use of the capital raised.
The direct and immediate link
In Sonaecom, the CJEU applied a broad interpretation on whether there was such a direct and immediate link to a particular output transaction to be established. Apparently, even if there is no particular direct output transaction connected to the used services, further analysis should be made on whether a subsequent output transaction can be identified to which the costs can be linked.
Sonaecom used the services for the bond placement, which in itself does not give rise to any output transaction. Those services were consumed in full when the capital was obtained. In this instance, Sonaecom claimed that the costs for the bond placement should be deductible as general costs and that the intended purpose of the issue of the bond was to continue the group’s economic activities.
The CJEU ruled that only where an input transaction cannot be allocated to an output transaction, the link between an input transaction and an undertaking’s overall economic activity should be examined as a secondary point. The CJEU simply followed the Advocate General and ruled there was a direct link between the services used and the use of the capital that was raised. By doing so, the CJEU seems to navigated away from the cost-component approach which assumes that direct costs of acquired services are part of the various cost components of a particular output transaction. In this instance, there is no such immediate link or direct output transaction. Moreover, at the time the costs for issuance of the bonds were incurred, there was no intention, link or connection between the services purchased and a VAT exempted output transaction.
Therefore, it would be interesting to see in which cases taxpayers need to ‘look through’ when incurring costs in the course of their overall economic activities and need to find specific output transactions at a later stage that can be linked to such costs. If this was a VATable output transaction, a taxpayer could still be eligible for the recovery of VAT also, where its overall economic activity gives right to only partial deduction of input VAT (i.e. on a pro rata basis).
In line with its earlier case law, the CJEU allows Sonaecom the deduction of VAT on costs in relation to an investment in another company with the intention to provide VATable management services to such company, even if investment does not take place.
However, where costs are incurred for attracting a loan or raising capital with a view of investing into such other company, further analysis should be made of the actual use of the capital raised when the investment would not take place. Although the outcome of this judgment was unfavourable for Sonaecom, the judgment broadens the opportunities to recover VAT on costs incurred in the case of unrealised transactions.
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