Portugal: VAT deductions on professional services related to unrealized acquisition, capital set-aside

Portugal: VAT deductions on professional services

The Court of Justice of the European Union (CJEU) rendered judgment holding that value added tax (VAT) may be deducted on purchased services in the event of a proposed but unrealized share acquisition.


The CJEU, however, held that the “setting aside” of capital in the form of an interest-bearing loan limits the VAT deduction of the associated costs.

The case is: Sonaecom (C-42/19, 12 November 2020).

KPMG observation

Because of the coronavirus (COVID-19) pandemic, many acquisition processes may have been put on hold. While the negotiations have not been terminated, the parties may remain in discussion with one another. Even without a crisis, an acquisition or investment may be postponed for a certain period. Therefore, the investing party needs to consider and anticipate the VAT implications of the temporary postponement of the transaction and, in particular, the manner in which the investor temporarily sets aside the raised capital. 


The taxpayer—a Portuguese holding company—was involved in the acquiring, holding, and managing participations. In 2005, the taxpayer sought to acquire shares in a second entity (the target company) so that it could subsequently perform management services for that entity for a fee. The taxpayer conducted market research with a view to the acquisition. In addition, it engaged an investment bank to effectuate a bond issue, so that the capital raised could be used to acquire the target’s shares. The taxpayer fully deducted the amount of VAT charged on the professional services and on the commission paid to the investment bank.

The shares in target company ultimately were not acquired. In the meantime, the taxpayer set the raised capital aside by providing an interest-bearing loan to its parent company. The Portuguese tax authorities took the position that the taxpayer could not deduct the VAT on the professional services provided and the commission paid to the investment bank because those costs were not incurred for VAT-able transactions. A Portuguese court referred the issues to the CJEU for a preliminary ruling on the deductibility of the VAT on these costs.

CJEU judgment

The CJEU first established that the taxpayer was a “mixed” holding company and that for VAT purposes, it performed both economic activities (management services to participations in exchange for a fee) and non-economic activities (the passive holding of participations). Besides the intention to acquire the shares in the target company, the taxpayer intended to provide VAT-able services to this (potential future) subsidiary in exchange for a fee.

The basic assumption is that there is no right of VAT recovery if only non-economic activities, such as the passive acquisition and holding of shares, are performed. Only when a holding company performs VAT-able services for its participation, or intends to do so, is there the active holding of shares, and the amount of VAT on the attributable costs is deductible.

The CJEU turned to address the amount of the VAT deduction on the professional services and held that the professional services (market research) concerned general overhead and therefore were not regarded as direct costs. According to the CJEU, there was no direct link between the VAT-able services performed by the holding company and the participation. These costs were related to the taxpayer’s overall business activity. The CJEU further clarified its earlier judgment in the Ryanair case (C-249/17)—a judgment in which the CJEU found that the VAT recovery on professional services for an unsuccessful acquisition was, in principle, permitted (but it was not entirely clear whether the CJEU regarded these services as direct costs or general overhead). The CJEU in the instant case clarified that these costs are general overhead, whereas in Ryanair, the VAT recovery right was determined by the overall business activity of the holding company.

The CJEU then addressed the claimed VAT deduction of commission paid to the investment bank for effectuating a bond issue. The CJEU concluded that the proposed VAT-able use or the actual VAT-exempt use of the capital was decisive. Because the taxpayer initially intended to use the capital raised with the bond issue to acquire the target (the future participation) but that this transaction did not advance to its conclusion, the taxpayer set the capital aside by providing an interest-bearing loan to its parent company—which was a VAT-exempt activity. The CJEU confirmed that the actual use of the services was decisive for the VAT recovery right. According to the CJEU, because the services were actually used for a VAT-exempt activity, the VAT on the paid commission was non-deductible.

Dutch practice and options for VAT deduction

Current Dutch practice with regard to the VAT deduction on professional services for a proposed acquisition of a participation is in line with the CJEU’s judgment in this case. The ultimate VAT recovery right for these costs is also in Dutch practice generally determined on the basis of the overall business activities of the holding company, provided the holding company intends to perform VAT-able services to the intended participation.

With regard to the VAT on professional services for the raising of capital (such as by an investment bank), consider the following comments.

  • Secure the VAT deduction for capital temporarily set aside: If, due to unforeseen circumstances, the capital raised cannot be immediately invested, there are options available to secure the VAT deduction on professional services as much as possible in anticipation of a new investment. If there are commercial considerations, the following options may apply:
    • The company that raised the capital provides an interest-bearing loan to a group company with which it forms a VAT group. The VAT group performs VAT-taxed services.
    • The company that raised the capital provides an interest-bearing loan to a group company that is established outside the European Union (as of January 1, 2021 the United Kingdom also falls under this).
    • The capital is held in order to realize the acquisition of a participation at a later date, to which VAT-taxed services will be provided. In that case it is crucial that you are able to convincingly demonstrate with objective documentation that this intention does indeed exist.
  • VAT exemption in the Netherlands on commission for a financial institution: The commission paid to a financial institution for arranging and effectuating a bond issue would be VAT-exempt in the Netherlands, unlike apparently in the Sonaecom case. This means that any non-deductible VAT on such commission paid to a financial institution would not be an issue in the Netherlands.

KPMG observation

If the intended acquisition of a participation cannot be realized, for example due to the COVID-19 crisis, taxpayers may want to examine the VAT implications in greater detail. In a broader sense, this judgment may also apply to other situations in which a company raises capital for an investment in the VAT-able sphere when circumstances cause the investment to be postponed. Depending on the manner in which that raised capital is temporarily set aside, this may have significant implications for the exercised VAT recovery right. Despite the CJEU judgment in the Sonaecom case, there may be various options available to arrive at a full or more optimal VAT deduction on professional services.

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

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