Merger Leveraged Buy-Out: deductible VAT for the Special Purpose Vehicle in Italy

The Court of Cassation, with judgments nr. 22608 and 22649 of 2024, recalling some principles of the EU Court of Justice, recognizes as deductible the VAT related to purchases incurred by the Special Purpose Vehicle (SPV), although these costs are sustained prior to the merger. 

These costs are indeed characterized by a preparatory nature in relation to the acquisition of the target's share.

It should be noted that in an MLBO transaction, the objective is to acquire shares in a target company from another special purpose vehicle, which is created specifically for this purpose. In an extraordinary corporate transaction structured in this way, the special purpose vehicle relies on financing sources to carry out the acquisition of the shares.

Once the stake is acquired, the special purpose vehicle proceeds with the merger with the target company, transferring the debt onto the assets of the latter.

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The steps are therefore summarised as follows:

• Establishment of the SPV,
• Resort to debt capital
• Acquisition of the “target" company by the SPV and, lastly
• Merger of the two companies.

The Italian Revenue Agency had expressed its position in Circular n. 6/E/2016, clarifying that the mere holding of shares, without the execution of VAT relevant transactions, does not constitute an economic activity and, therefore, the vehicle company cannot be recognized as a VAT taxable subject resulting in the inability to exercise the right to deduct the tax.

This view was later confirmed, during 2019, by legal advice nr. 17 of the Tax Authority, which recalls case C-249/17, better known as “Ryanair Ltd". Also on this occasion, the Tax Administration confirmed that VAT on costs incurred by an SPV in an MLBO transaction was not deductible.

The Court of Cassation with its decisions of 2024 has instead established that VAT could be detracted on a “prospective" basis, precisely because these preparatory costs are sustained with the purpose of using them for the prosecution of the economic activity in the company resulting from the transaction.

According to Assonime, taxpayers who, aligning with the restrictive positions of the Italian Revenue Agency, had not already exercised the right to deduct, could now recover the VAT in question, alternatively, by submitting a claim for reimbursement pursuant to art. 30-ter of DPR 633/1972, or by transmitting a supplementary VAT return (pursuant to art. 8, par. 6-bis of DPR 322/1998).

In conclusion, the recent rulings of the Court of Cassation mark an important progress, but the topic of VAT deductibility in MLBO transaction remains complex and not fully resolved.

While awaiting a desirable change in direction by the Italian Revenue Agency, it is essential to carefully evaluate, case by case, the most appropriate way to exercise the right to deduct, taking into account the peculiarities of each individual transaction and the risk of disputes.