Legal Alert Deductibility Of Input VAT Included In M&A Costs Within Group Companies
On 14 June 2013 the Finnish Supreme Administrative Court issued its ruling (KHO 2013:107) concerning parent companys right to deduct input VAT included in the M&A costs of a group of companies. Before this ruling, the main rule in Finland has been that, the parent company has had the right to deduct also the input VAT included in the M&A costs of other group of companies since they have been treated as general expenses of the group. The said ruling will update the current situation.
In the case that the Supreme Administrative Court discussed, a Finnish parent company, A Oy, had paid an invoice issued by a German consulting firm which did not have a fixed establishment in Finland and which had not applied voluntarily for the Finnish VAT register. The invoice was addressed to the parent company. The invoice related to a due diligence investigation which the consulting firm had performed on a German company, whose shares a German subsidiary of A Oy had acquired. In the reassessment process the VAT included in the M&A costs had been imposed to A Oy based on reverse charge.
According to Supreme Administrative Court, A Oy had not shown that the consulting services in question were directly linked to A Oys own VAT liable business activities or that A Oy had recharged those costs to its German subsidiary. The consulting services in question did not have any direct and instant connection with the VAT liable business activities of A, but they were directly and instantly connected with A Oys German subsidiarys business activities. Accordingly, the costs were not deductible as general costs related to A Oys VAT liable business activities. Hence, the Supreme Administrative court ruled that A Oy did not have the right to deduct the VAT included in the M&A costs.
In the future groups of companies planning on business restructuring should take into account that the deductibility of VAT included in the M&A costs may be restricted due to this new ruling by the Supreme Administrative court.