Legal Alerts/27 Oct 2022
New Preliminary Ruling Confirms the VAT Deductibility of Share Acquisition Costs
Who has the right to deduct VAT? Our tax team recently addressed this endlessly debated question when we successfully represented a private equity investor in a case concerning the right to deduct VAT incurred on acquisition costs.
In this case, the Finnish Central Tax Board gave a preliminary ruling KVL:2022/42 on 28th September 2022 on the VAT deduction right of share acquisition costs accrued to a holding company that is owned indirectly by a private equity fund. This new ruling follows the previous ruling issued by the Central Tax Board on the same topic.
This is a notable achievement, as the Finnish Tax Administration has in most cases continued to dispute the acquisition costs’ deduction right in terms of companies held by private equity investors, despite the previously issued ruling of the Central Tax Board (KVL:2020/46).
However, this new ruling confirms, that most of the typical costs accrued in an acquisition process are related to acquisition of shares, which means that the costs are deductible for holding companies performing VAT taxable business activities.
The nature of the acquisition costs
The new ruling confirms that the holding company has the right to deduct VAT included in the due diligence and legal costs, such as
- establishment and registrations of the acquiring company,
- SPA negotiations,
- commercial, legal, tax and other due diligence
- advisory on antitrust matters,
- coordination of the acquisition process,
- assistance in signing and closing, and
- assistance with financial negotiations and W&I insurance.
In practice, this covers almost all of the buy-side advisor costs in typical transaction.
According to the Central Tax Board, the costs related to other group companies in the acquisition structure are not deductible for the acquiring company. Also, the ruling states that costs related to structuring are not deductible for the acquiring company if the structuring concerns a group structure between a fund and a target company. Also, the costs of the financier’s advisor are considered non-deductible for the acquiring company.
The ruling clarifies the interpretation
In our view, the decision is mostly in line with the Finnish and EJC case law, and it shows that the nature of typical acquisition costs is indeed a cost related to the acquisition of shares and that such costs relate to the business activities of the holding company.
Thus, the argumentation of the Finnish Tax Administration stating that such costs are considered as investors’ costs is incorrect. Although the ruling is not yet legally binding, the decision should provide any holding company – directly or indirectly held by a private investor and involved in active management of acquired companies – with additional support if the Tax Administration has denied the holding company’s right to deduct acquisition costs.
Borenius’ lawyers Henna Jovio and Anna-Riikka Nummi are available to assist in addressing any questions you may have regarding this preliminary ruling.