VAT recoverability for transaction costs incurred by an SPV in MLBO (Merger Leverage Buy Out) transactions
ItalyIn accordance with CJEU principles, the Court accepted the VAT recovery on the deal costs incurred by the SPV in relation to the transaction.
The VAT recoverability is strictly linked to the inherent nature of the MLBO transaction, characterized by the (i) incorporation of the SPV, (ii) the financing of the SPV, (iii) the acquisition of the target company by the SPV and (iii) the direct or – as in the case at stake – reverse merger of the two companies.
The transaction costs incurred by the SPV (e.g., advisory and legal services, due diligence, etc.) qualify as instrumental and preparatory costs, the aim of which is the pursuance of the target company's economic activity. Such preparatory activities are per se linked to the exercise of an economic activity by the SPV, as opposed to passive holdings. Therefore, following the merger phase, the target company may recover input VAT paid by the SPV on deal costs (in accordance with the target's VAT recovery position).
By applying the CJEU principles, the Court challenges the Italian Tax Authority interpretation which has consistently disallowed the right to recover VAT in the context of MLBO transactions.
Key takeaway
In the context of M&A transactions, the Supreme Court's interpretation confirms the possibility to recover VAT incurred on transaction costs, possibly by filing a VAT refund claim within the Italian statutory time limits. For acquisitions and reorganisations processes VAT downside can be reduced to nil under certain conditions.
