CJEU: new developments in the realm of VAT recovery on dead deal costs

2 mn

On 12 November 2020, the Court of Justice of the European Union (“CJEU”) gave its ruling in the Sonaecom case (C-42/19) with respect to entitlement to deduct the VAT incurred for consultancy services provided in view of a potential share acquisition, and for a bank commission on the set-up of a bond loan, where neither the acquisition nor the loan’s original purpose ever materialised.


Sonaecom SGPS SA (“Sonaecom”) is an active holding company providing strategic management and coordination services in the field of telecommunications and media.

In the context of a prospective acquisition of shares in a company in the telecommunications sector, and with the intention of rendering taxable management services to the target once acquired, Sonaecom purchased consultancy services consisting of a market study, for which it deducted all input VAT.

In addition, Sonaecom paid a taxable commission to a bank for organising and putting together a bond loan with a view to making subsequent investments in a new business sector. However, the capital raised through the bond issuance was eventually used to grant a loan to the parent company, instead of for the investments initially planned. Nevertheless, Sonaecom applied a similar VAT deduction to the bank commission.
These input VAT deductions were challenged by the local tax authorities, and the question of whether Sonaecom was entitled to such a VAT deduction in the above circumstances was put to the CJEU, for both types of service (the consultancy services and the bank commission).


CJEU judgment

In answer to the first question with respect to deducting the VAT paid on consultancy services related to an aborted share acquisition: the CJEU held that a mixed holding company, being involved in the recurrent management of its subsidiaries (which constitutes a taxable activity for VAT purposes), is entitled to deduct input VAT paid on consultancy services contracted for in the context of acquiring the shares of another company, even if the acquisition does not take place.

In answer to the second question with respect to deducting the VAT paid on costs when the initial intended use of the purchased services has changed in the meantime (i.e. the bond loan which gave rise to the bank commission was initially planned to finance investments, but was ultimately used for a different loan transaction): the CJEU found that where a mixed holding company ultimately uses services for the purpose of activities not eligible for input VAT deduction (i.e. granting the loan to the parent company, which transaction is VAT-exempt), and where there is a direct link between the input and the output transaction, that holding company should not be entitled to deduct input VAT paid on the costs incurred through those activities. Thus, the VAT deduction initially performed had to be corrected.

This is a welcome ruling which reaffirms settled CJEU case law (in particular case C-249/17 involving Ryanair) on the input VAT deductions available to active holding companies on dead deal costs.

Note that this judgement has thus provided clarification on the potential need to modify any input VAT deduction following a change in the ultimate use of cost-incurring goods and services. It is important to bear this in mind, and henceforth to consider the potential positive or negative VAT implications of such changes.

The Arendt VAT team remains at your disposal should you require any further information in this respect.