While it remains to be seen whether the Court of Justice of the EU (CJEU) will rule in the same way as its advocate general (AG) when it hears the case in the coming months, AG Kokott's opinion "clearly focuses on the economic reality of the situation", according to tax expert Jamie Robson of Pinsent Masons, the law firm behind Out-Law.com.
"The deductibility of input VAT incurred on transaction costs has long been an area that has presented significant difficulty for VAT practitioners; whether the transaction is abortive, as in this case, or successful," he said.
"It is interesting to see the AG take an approach that so clearly focuses on the economic reality of the situation, applying a functional analysis rather than looking at the legal entities involved. In this case, the approach is of assistance to the taxpayer, but there may be other circumstances where various tax authorities may be all too tempted to 'pierce the veil' otherwise than in the taxpayer's favour," he said.
Ryanair was seeking to have VAT charged on its professional adviser fees treated as input tax, meaning that it would be able to reclaim or deduct that amount when accounting for VAT to the Irish revenue commissioners. Had its takeover bid been successful, the company planned to operate an airline business through a single corporate group which would have provided management services to Aer Lingus. The bid was ultimately blocked by the European Commission for competition law reasons.
Its case reached the Irish Supreme Court, which has now asked the CJEU whether a future intention to provide management services to a takeover target in the event of a successful takeover target is sufficient to establish that the potential acquirer is engaged in "economic activity" as provided for by the Sixth VAT Directive. The Supreme Court also considered whether, if Ryanair's failed bid be found to amount to economic activity, the VAT on services provided to it in order to progress that acquisition should then be treatable as input tax.
Previous CJEU case law has established that the provision of management services to a subsidiary is economic activity, and that input tax can be claimed as a deduction where there is a "direct and immediate link" between the goods and services on which that input VAT arose and the management services provided. It has also been established that input VAT can be claimed for abortive investments. However, the mere acquisition and holding of shares by a holding company is not considered to be economic activity.
AG Kokott said that, in her view, a "functional analysis" should follow from the settled case law, which "takes into account the taxable person's main operating business and has regard to the link between the acquisition of shares and economic activity".
"A functional analysis better addresses the economic dimension of the case," she said. "Although in this instance the takeover of a competitor is intended to be achieved by acquiring shares in the company, the case is much closer to the situation where an undertaking plans to buy up all of a competitor's physical equipment and facilities than to the situation where an undertaking wishes to purchase shares merely to generate dividends."
"The strategic takeover of an undertaking by which the acquiring company pursues the aim of extending or modifying its operating business is to be regarded as ... a direct, permanent and necessary extension of a taxable activity. Although such a takeover is accompanied by the acquisition of shares in the company, it constitutes a measure aimed at (extended) taxable turnover," she said.