In the Netherlands, the value added tax (VAT) on professional services generally can be deducted if a takeover is unsuccessful, provided that there is an objective intention to provide services subject to VAT in respect of that participation. The objective intention requirement is present if investigation shows that the acquirer is involved in the management of the other participations already held, or if its policy makes clear that new participations are always added to the existing VAT group.
The Dutch tax authorities can require that the intention to perform activities subject to VAT be substantiated with objective data (e.g., draft contracts, minutes of board meetings, remarks made in the financial statements, etc.). If the business can satisfy this request, experience reveals that this position can be maintained in respect of new participations that are to be acquired—even if the transaction does not go ahead. In such instances, the deduction is applied in line with the normal deduction entitlement that applies to the taxpayer’s entire business activity. If the acquirer does not yet have a track record for its existing participations, or always holds it participations passively, then the VAT on professional services may appear to be non-deductible.
The Supreme Court of Ireland in May 2017 requested the Court of Justice of the European Union (CJEU) to render a preliminary ruling in a VAT case (Ryanair C-249/17). The two questions posed to the CJEU concerned the deductibility of VAT on professional services. The taxpayer had purchased these services, because the company wished to acquire shares in its competitor. The High Court of Ireland previously held that the VAT on these professional services could not be deducted, because the takeover attempt had ultimately failed.
The outcome in this case could be particularly significant to, for example, private equity firms and the M&A practice within groups.
How will the CJEU hold?
The outcome of the CJEU’s judgment could be particularly significant to, for example, private equity firms and the M&A practice within groups. Taxpayers that are intending to make acquisitions need to consider reviewing their VAT position on time. It may be wise in the early stages of an acquisition to objectively substantiate that the taxpayer intends to perform activities subject to VAT for the intended participation, and thus enable the taxpayer to secure the recovery of input VAT as much as possible, even if the acquisition is unsuccessful.
In the Netherlands, taxpayers currently consulting with the Dutch tax authorities and that supplementary assessments have been or will be imposed, need to consider filing a notice of objection in order to preserve their rights, and refer to the Ryanair case (C-249/17). In some instances, it may be advisable to wait for the CJEU judgment.
Read a July 2017 report prepared by the KPMG member firm in the Netherlands
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor 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. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.