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M&A costs: Deductibility of input VAT included within group companies
In the case discussed by the Supreme Administrative Court, a Finnish parent company, A Oy, had paid an invoice issued by a German consulting firm. The consulting firm did not have a fixed establishment in Finland and had not applied voluntarily for the Finnish VAT register. The invoice was addressed to the parent company and related to a due diligence investigation which the consulting firm had performed on a German company, whose shares had been acquired by a German subsidiary of A Oy. In the reassessment process the input VAT included in the M&A costs had been imposed to A Oy as a final cost based on reverse charge.
According to the Supreme Administrative Court, A Oy had not shown that the consulting services in question were directly linked to A Oy’s own VAT liable business activities, or that A Oy had recharged those costs to its German subsidiary.
The consulting services in question did not have any direct and instant connection with the VAT liable business activities of A, but they were directly and instantly connected with A Oy’s German subsidiary’s business activities. As a result, the costs were not deductible as general costs related to A Oy’s VAT liable business activities (ie as a group). Hence, the Supreme Administrative court ruled that A Oy did not have the right to deduct the VAT included in the M&A costs.
As mentioned, before this recent ruling, the main rule in Finland had been that the parent company had a right to also deduct the input VAT included in the M&A costs of other companies within the group. In future, however, groups of companies planning on business restructuring should take into account that the deductibility of input VAT included in the M&A costs is now restricted due to this new ruling by the Supreme Administrative court.