Recent VAT decisions further emphasize the need for careful VAT planning for share transactions
Finnish VAT decisions concerning the deductibility of transaction costs and the VAT treatment of management services, including a nominal amount of financial and insurance-related services, further emphasizes the need for careful VAT planning for ongoing and future share transactions.
The right to deduct VAT in share transactions involving private equity funds is still a topical issue because the Finnish Tax Administration has continued to apply the rules strictly, claiming that the majority of the costs should be allocated to the funds.
We covered the topic in detail in our previous Insights article published in April 2022 and described the conditions that must be met to deduct VAT and how this can be supported with good advance planning and documentation. We also emphasized the importance of focusing on the actual beneficiary of the transactions, documenting the content of services, and timing issues (please see our previous article for more details).
Our previous article also covered the preliminary ruling issued by the Central Tax Board (CTB) in December 2020 (number 2020:46), where the VAT deductions made by the acquiring company were allowed, even though a private equity fund had established the acquisition structure. Even though the CTB’s VAT decision was not appealed, the Finnish Tax Administration continued challenging such VAT deductions by stating that the costs were accrued during private equity investment activities and, as such, were non-deductible for companies incorporated for acquisition purposes.
Central Tax Board decision KVL:2022/42
The CTB issued another VAT ruling (number 2022:42, issued on 28 September 2022) concerning the same issue, i.e., the deductibility of share acquisition costs in circumstances in which a private equity fund had incorporated a company to carry out a share acquisition. In the application, different types of services were described in detail. According to the ruling, the right to deduct VAT was extensive and, thus, the ruling confirmed the conclusions in line with the CTB’s previous ruling.
The two rulings very clearly confirmed that most of the VAT included in typical acquisition costs (due diligence-related costs, legal advisory costs, SPA negotiations, etc.) are deductible even if an acquisition is carried out indirectly by a private equity fund.
However, the following costs were deemed by the CTB to be non-deductible for VAT purposes:
- costs related to the drafting of a shareholder’s agreement, as these costs were deemed to constitute costs incurred by the shareholders rather than the acquiring company;
- advisory costs incurred by external finance providers (e.g. banks), as they were more closely linked to the economic activity of the finance providers (i.e., there is a clear difference between advisory costs incurred by external finance providers and the costs incurred by the acquiring company relating to the acquisition of the finance); and
- costs related to the planning of the acquisition structure between the private equity fund and the target company, as these costs were deemed to be more closely connected to the economic activity of the fund which had established the acquisition structure. This should not have an impact on costs incurred for structuring arrangements under the acquisition company, e.g. related to refinancing.
Hopefully, the CTB’s latest ruling will further reinforce the extensive right to make VAT deductions and related VAT principles, and the Finnish Tax Administration will follow it. The CTB’s ruling also emphasizes the importance of separating deductible and non-deductible costs.
Supreme Administrative Court decision KHO 2022:128 concerning the VAT treatment of management fees
The Supreme Administrative Court has issued a decision concerning the VAT treatment of management fees, including a nominal amount of financial and insurance-related services which should also be taken into account when planning ongoing and future share transactions.
In the Supreme Administrative Court’s VAT case KHO 2022:128, the parent company was providing standard management services subject to VAT to its subsidiaries. One of the subsidiaries was a dormant holding company (i.e., the subsidiary temporarily had no economic activity) with no need for the management services provided by the parent company. The management services included a nominal amount of financial and insurance-related services (less than 1% of the overall hours worked by the parent company’s employees was spent on providing these services).
In spite of this, the Supreme Administrative Court concluded that the nominal amount of services was separate and had to be treated as exempt from VAT. Thus, the amount had to be included in the calculation of general costs, i.e., costs having a direct and immediate link to the parent company’s economic activity. Also, the mere possession of a dormant holding company had to be included in the parent company’s calculation of general costs.
As a result, input VAT deductions of the general costs of Finnish parent companies could be more limited, if management services include financial or insurance-related services or the company’s structure includes holding companies that do not conduct any economic activity. Therefore, to the extent the management services include financial or insurance-related services or such services are not provided to all subsidiaries, these services could also restrict VAT input deductions in acquisition structures.
The decisions emphasize the need for careful advance planning
Even though the majority of the typical costs were deemed to be deductible in the CTB’s latest decision, the Finnish Tax Administration is still actively investigating and challenging whether transaction costs are deductible if the acquiring company has been established by a private equity fund. The Finnish Tax Administration’s continued reluctance to accept the deductibility of transaction costs and the new interpretation of the providing of management services, including a minor amount of services exempt from VAT and subsidiaries with no use for such management fees, highlight the role of advance planning of the structure and consideration of the content of VAT costs and their invoicing.
Our tax team would be happy to discuss these issues further, and offers assistance and support on all related issues and ongoing or contemplated VAT audits to achieve the best possible outcome.