Conflicting Italian perspectives on VAT deductions within the framework of MLBO transactions

The VAT legislation provides that, in principle, each taxable person shall be entitled to deduct input VAT paid on its purchases of goods and services “in so far as the goods and services are used for the purposes” of its taxable transactions.

To exercise the right of input VAT deduction on one’s purchases, it is therefore necessary for the person invoking that right:

• To qualify as a taxable person for VAT purposes (thus carrying out, independently, an ‘economic activity’, regardless of the purpose or result of that activity); and

• To use the purchased goods and services for the purpose of its own taxable transaction.

However, the concrete application of these criteria in relation to acquisition vehicles (special purpose vehicles, or SPVs) incorporated in the framework of merger leveraged buyout (MLBO) transactions is only apparently simple, and the Italian tax authorities and the Italian Association of Chartered Accountants (AIDC) have taken diametrically opposed conclusions.

According to the Italian tax authorities, the mere acquisition of the share capital of a target company by an SPV would be sufficient to classify the SPV as a ‘passive’ holding company, even if prearranged for (and functional to) the subsequent merger, if not accompanied by a direct or indirect involvement in the management of the target company which entails the performance of taxable transactions. A passive holding company does not qualify as a taxable person for VAT purposes and thus has no right to deduct input VAT (see, inter alia, Circular Letter No. 6 of March 30 2016 and Legal Advice No. 17 of June 20 2019).

This position is based on the settled case law of the Court of Justice of the European Union (CJEU) whereby the mere acquisition of financial holdings in other undertakings does not amount to an economic activity, unless the participation is accompanied by direct or indirect involvement in the management of the company in which the holding has been acquired, such involvement entailing the performance of transactions subject to VAT.

From this perspective, the SPV would qualify as a VAT taxable person if it performs transactions constituting economic activities (for example, supplies of goods or services for consideration) for the benefit of the target during the (usually very limited) time between the acquisition of the controlling interest and the merger.

According to the AIDC, on the contrary, the specific features and peculiarities of MLBO transactions make it perfectly clear that the acquisition of shares is – in such context – only transitory and merely a means to complete the merger, which is a prerequisite and the purpose of the entire transaction. The SPV is indeed never set up for the purpose of holding (passively or actively) shares and participations, but rather as an instrument for the acquisition and direct management, post merger, of the ‘business’ of the target.

In light of the above, the AIDC maintains that:

• The purchases of goods and services made by the SPV (having as their object, inter alia, the structuring of the MLBO and its financial sustainability in the medium term) concretise a ‘preparatory activity’ functional to the carrying out and development of the business activity of the company resulting from the merger, which is sufficient to qualify the vehicle as a taxable person for VAT purposes (irrespective of the performance of other supplies for consideration vis-à-vis the target); and

• The deductibility of VAT incurred by the SPV on its purchases should be recognised or excluded depending on the nature of the output supplies that will be performed by the company resulting from the merger between the SPV and the target. A similar issue was addressed by the CJEU in its judgment in case C-137/02, Faxworld, which allows consideration of the intention to make taxable supplies by reference not just to the person incurring VAT, but also, in other circumstances, another person, when the latter is the successor of the former pursuant to the national VAT legislation implementing the ‘no supply-rule’ laid down by Article 19 of Directive 2006/112/EC. Additionally, the Italian legislator, availing itself of the no-supply rule, expressly excludes the transfer of goods and services in connection with mergers from the scope of VAT and recognises the principle of continuity of the business activity by virtue of which the company resulting from a merger automatically takes over the subjective position of the incorporated ones, also with regard to VAT. The Faxworld principle should therefore also apply, mutatis mutandis, to SPVs incurring costs for the purpose of MLBO transactions.

The above position is also consistent with the principle of neutrality, sub specie of the ‘neutrality of the legal form’. Although MLBOs are normally realised through the prior acquisition of the shareholdings of the target, they are much closer to the case of a newly incorporated company wishing to acquire all the assets of a target company, rather than to a company interested in acquiring shares in the capacity of a holding company.

It is common ground that such modus operandi (direct purchase of all assets, as single assets or as a going concern) would require granting the acquiring company the status of a VAT taxable person and the right to deduct input VAT paid in the context of such transaction.

Although never officially endorsed by the Italian tax authorities, the AIDC arguments are shared by tax practitioners and literature, both in Italy and abroad; have been supported by Advocate General Kokott in her opinion in case C-249/17, Ryanair; and been embraced by the first, and to date only, judgment on the merits published in Italy (Tax Court of First Instance of Milan, judgment of December 5 2022, No. 3361/7/2022).

It would therefore be appropriate for the Italian tax authorities to revise their position and provide a less formalistic interpretation, more respectful of the principle of tax neutrality. This approach would entail the prohibition of treating similar situations differently (thus precluding VAT treatments from being solely based on the ‘legal form’ of the transaction, in terms of a share, rather than an asset, deal) and treating different situations in the same way (thus precluding the application of the hermeneutic criteria developed by the CJEU in relation to holding companies for the different situations of corporate vehicles designed to carry out MLBO transactions).