Limitation of VAT recovery on transaction costs in M&A transactions

A Dutch court issued a ruling regarding the recovery of VAT on transaction costs related to the acquisition of a Dutch company. A private equity fund set up a Dutch limited partnership (CV) which procured a range of advisory and lawyer services in relation to an envisaged acquisition. Where the private equity fund decided to proceed with the acquisition of a company, a new entity was set up (Bidco) just before the acquisition.

The CV concluded two agreements with Bidco authorising it to (i) re-charge the advisory costs to Bidco and (ii) appoint a member of the supervisory board. The CV sought to recover the input VAT incurred on the transaction costs, which was denied by the Dutch tax authorities (DTA).

The court confirmed the position of the DTA that the CV was not an entrepreneur for Dutch VAT purposes, as the sole recharging of costs and the appointment of a member of the supervisory board of Bidco do not constitute economic activities for VAT purposes. As a result, the CV could not deduct any VAT on the incurred transaction costs.

Key takeaway

VAT recovery on transaction costs for company acquisitions in the Netherlands has been a significant issue. According to CJEU case law, a holding company providing managerial or other services to the target company (for a fee) may be considered a VAT taxable entity and eligible for VAT recovery if the services are used for VAT taxable activities.

However, the recent ruling highlights that VAT recovery during M&A transactions may not always be feasible, as non-economic activities can restrict the right to recover VAT. This serves as a reminder that certain situations may lead to limitations on VAT recovery.