Input VAT deduction in case of leveraged buy-out

The Tax Court of Justice of Lombardy, second instance, stated a key principle in Ruling No 3755/2023: the input VAT related to the transaction costs incurred into in the context of a merger leveraged buy-out transactions (MLBO) can be deducted.
The transaction costs include all the expenses borne for carrying out a MLBO, including but not limited to the legal, tax, accounting and labour advisory costs, the due diligence assistance costs, the notary expenses, etc. With particular reference to the case at stake, a target company acquired through a special purpose vehicle (SPV), was merged into the SPV itself without shutting down its activity.
The Italian Revenue Agency claimed that the SPV was a passive financial investment target and denied the input VAT deduction on this transaction. Indeed, in case a target entity does not carry out a business activity, the VAT deduction is not allowed. On that basis, the Revenue Agency Tax Office challenged the deduction of the input VAT on the transaction costs.
The Court of Justice instead stated that the VAT subjective conditions must not be verified on the formal aspects of the SPV, yet through a substantial analysis which must keep into account the actual activity carried out in the transaction as a whole.
In particular, in the case at stake, the SPV performed the key function of raising the funds necessary for the acquisition of the target and also for its direct management after the merger. In this context, the acquisition of the Target must be considered as a preparatory activity, in the light of the business activities of the SPV carried out throughout the transaction.
The substantial analysis proved that the SPV was not a mere passive income entity and that the preparatory activity carried out by the SPV was aimed at achieving a wider VAT relevant activity, eligible for the input VAT deduction.
The decision of the Tax Court of Justice marks a turning point in the VAT regulation for what concerns the basic VAT deduction principles; thus, some reasoning should be made about the opportunity to apply for the reclaim of the VAT related to not deducted transaction costs.
With regard to MLBO, it is worth recalling some key clarifications released by the Italian Tax Office with Ruling No 22/2024:

  1. art. 172, § 7, of the Italian Corporate Tax Code, concerning the limitations in the transfer of tax losses, passive interests and ACE deduction carried forward are not applicable in case of MLBO. In short, such transactions must be reviewed based on a thorough approach and on their final business purpose;
  2. the tax attributes generated by the SPV and the target before the effective date of the merger cannot be transferred to the tax consolidation regime implemented by the Target before the transaction;
  3. the portion of the consideration paid to the Seller and reinvested by the Seller itself in the SPV are not eligible for the calculation of the s.c. ACE deduction. The Tax Office, confirming the considerations expressed in Ruling No 01/2019, qualifies such scheme as a round-trip of funds, not relevant as a factual capital increase. In this regards, no relevance shall be given to the subsequent (partial) re-investment from the SPV in new capex acquisition.