VWFS + Ryanair: important input VAT recovery questions | KPMG | LU
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Luxembourg Tax Alert 2018-20

Luxembourg Tax Alert 2018-20

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VWFS + Ryanair: important input VAT recovery questions

On 17 and 18 October 2018, the Court of Justice of the European Union (CJEU) released two decisions, Ryanair (C-249/17) and Volkswagen Financial Services Limited (C-153/17), respectively, concerning input VAT recovery questions: 

    1) Ryanair (C-249/17)

Reminder of facts:

The Irish airline Ryanair had launched a bid to acquire all the shares of the Aer Lingus airline. During that occasion, Ryanair incurred expenses as regards consultancy services and other services in connection with the planned acquisition. In the end, however, Ryanair was unable to carry out the transaction fully because of competition issues. Ryanair requested the deduction of input VAT paid on that expenditure, based on the fact that the company had the intention of involving itself in the management of the acquired company and providing management services subject to VAT.

Decision of the CJEU:

The questions referred to the Court mainly concerned the possibility of Ryanair to be considered a taxable person by means of the activity it was carrying out and whether the supplies of services at hand implied the possibility of deducting the input VAT incurred by the company.

As regards the question of whether Ryanair could be considered a taxable person, the Court reminded that it was important to consider whether or not the acquisition of the shares in Aer Lingus would have implied a direct or indirect involvement of the company in the management of the latter. Indeed, further to a constant case law, the mere acquisition and holding of shares do not in themselves confer on the holder the status of a taxable person . The CJEU underline the fact that preparatory acts also constitute an economic activity . The Court held that Ryanair’s intention was indeed to provide Aer Lingus with management services subject to VAT and, therefore, carry out an economic activity for VAT purposes. In this respect, Ryanair should be considered a taxable person with respect to the intended acquisition.

As regards the question of whether Ryanair should have the right to deduct its input VAT in relation with the expenditure it incurred, the CJEU reminded that this right is a general principle of EU law which shall not be limited. Indeed, an input VAT deduction right should exist for any taxable person (carrying out a taxable economic activity for VAT purposes), even though the acquisition is not realized in the end and/or the goods and services for its intended activity are not used.

The input VAT deduction right has to be proved by the existence of a direct and immediate link between a particular input and a particular output transaction giving rise to deduction. The Court stated that this assumes that the expenditure incurred in acquiring the input goods and services is a component of the cost of the output transactions giving rise to the right to deduct . However, in Ryanair’s specific situation, it appeared that the services at issue were provided when the company had the asserted intention to acquire Aer Lingus’ shares and provide the latter with taxable services, which at the end did not materialize. The Court inferred that the expenditure incurred by Ryanair had a direct and immediate link with its taxable economic activity and constituted a part of its general costs. Based on that, Ryanair should benefit from a full input VAT recovery right on the costs related to the intended acquisition.

    2) Volkswagen Financial Services Limited (C-153/17)

Reminder of facts:

Volkswagen Financial Services Limited (VWFS) offers customers the possibility to hire purchase its motor vehicles. When it concludes hire purchase agreements, VWFS acquires vehicles from the dealer and then supplies them to the customer without generating any margin. The ownership of the agreement passes to the customer once all the payments due under the terms of the agreement are made. For VAT purposes, this transaction is considered as a composite supply: the first one being a supply of a vehicle (subject to VAT) while the second one being the granting of a credit (VAT exempt).

In the calculation of its input VAT recovery right, VWFS benefits from a ‘partial exemption special method’ agreed with the UK tax authorities . The matter in this affair relates to the ‘residual input VAT’ that is apportioned between its business sectors, particularly in proportion to the turnover of each sector. This residual VAT would, however, be calculated without taking into account the value of the vehicles sold under hire purchase agreements.

The question referred to the CJEU concerns the determination of the input VAT recovery right and whether the calculation of this amount should consider the actual and non-negligible allocation of general costs to transactions giving rise to recovery.

Decision of the CJEU:

The Court reminded that the input VAT recovery right is a fundamental principle of the common system of VAT established by EU law and may not be limited . As in the previous case, the Court underlined that the existence of a direct and immediate link between a particular input and output transaction(s) is necessary to demonstrate the existence of a right to deduct and its extent. However, it should remain possible for the taxable person to deduct its input VAT even where there is no such link, insofar as the costs of the services in question are part of the general costs of the taxable person. The input VAT recovery right should, in principle, be calculated based on the turnover allocation key.

In the case of VWFS, insofar as the general costs allocated to the retail sector concern goods and services used for both kinds of transactions (giving and not giving rise to deduction), a deductible proportion must be calculated. As regards this calculation, the Court stated that the method chosen should not necessarily be the most precise, but grant a more precise result than the one based on the turnover-based allocation key . Furthermore, even in the case where no margin would arise from the hire purchase of the vehicles for the customers, the Court confirmed that the company should be entitled to an input VAT recovery right.

In the case at hand, the general costs at issue have a direct and immediate link with the activities of VWFS and constitute a component of the price of the global supply. Therefore, VAT on the general costs should be recoverable.

As regards the method applied by the authorities for calculating the deductible proportion of VAT, it is for the national court to ascertain whether that method takes into account the actual and non-negligible allocation of a share of the general costs for the purposes of the transaction giving rise to a right to deduct.

This decision is interesting at the following levels:

  • First, the Court confirms that, as regards the methodology used for the calculation of the input VAT recovery, one shall consider the method generating a more precise result.
  • Second, it is important to determine whether this decision would not influence the current practice of the Luxembourg VAT authorities, which is currently not to take the costs of the reinvoicing without margin into consideration for the calculation of the pro rata (and, therefore, to limit the input VAT deduction on such costs).

Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.

Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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