Portugal: VAT deduction limitation when capital for new investment is set aside

Portugal: VAT deduction limitation

The Advocate General of the Court of Justice of the European Union (CJEU) on 14 May 2020 issued an opinion in a case concerning the deduction of value added tax (VAT) on professional services and investment banking fees for an intended share acquisition that was ultimately not realized.


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According to the Advocate General, by “setting aside” the capital in an interest-bearing loan within the group, the taxpayer was faced with a deduction limitation for VAT purposes.

The opinion was issued in the Sonaecom case (C‑42/19)

KPMG observation

As a result of the coronavirus (COVID-19) pandemic, setting an investment “on hold” and holding the capital raised for it may occur more frequently. If the capital is held in expectation of a new investment, it may be possible to avoid the limit on a VAT deduction. If, however, the intended acquisition of a participation cannot be realized, taxpayers need to consider the VAT implications of this situation in greater detail. In light of the Advocate General’s opinion, there may be various possibilities available so that the VAT on professional services is fully deductible.


The taxpayer (a Portuguese holding company involved with the acquisition, holding and management of participations) wanted in 2015 to acquire shares in another entity that was involved with audiovisual entertainment, telephony and internet. The taxpayer conducted market research with a view to the acquisition, and it also engaged an investment bank to effectuate a bond issue. The taxpayer wanted to use the capital that was raised to acquire the shares in the audiovisual entity in order to subsequently perform services for it in exchange for a fee. The taxpayer fully deducted the VAT charged on the professional services and on the investment banking fee.

The shares in the other entity ultimately were not acquired. In the meantime, the taxpayer had set the raised capital aside by providing an interest-bearing loan to its parent company.

The Portuguese tax authorities argued that the taxpayer could not deduct VAT on the professional services and the investment banking fee. However, the VAT was attributable to a non-economic activity (the acquisition and management of a participation) but was also attributable to a VAT-exempt activity (a loan to the parent company).

The Portuguese court decided to ask the CJEU for a preliminary ruling on the VAT treatment.

Advocate General’s opinion

The Advocate General found:

  • The professional services could be allocated directly to the intended acquisition of the participation and the subsequent envisaged VAT-taxed services. The fact that the acquisition ultimately did not proceed, therefore, did not warrant an obligation to adjust the VAT previously deducted.
  • Concerning the VAT deduction in respect of the investment banking fee for the issue of bonds, the actual use of the services was decisive for the VAT recovery right, and the VAT on the fee paid to the investment bank was thus non-deductible.

KPMG observation

The next step is to see whether the CJEU follows the opinion of the Advocate General. Regardless of the outcome, taxpayers need to identify, in advance, the VAT implications of an intended investment and consider the steps that will need to be taken in the unlikely event that the investment is not realized.

Read a May 2020 report prepared by the KPMG member firm in the Netherlands

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