Deductibility of VAT in Leveraged Buy-Out Merger Operations: Commentary on Judgment No. 22608 of 2024

Judgment No. 22608 of August 9, 2024, issued by the Court of Cassation, offers important clarification regarding the deductibility of Value Added Tax (VAT) for leveraged buy-out (LBO) merger operations. This type of operation represents an acquisition strategy where an investor uses a mix of debt and equity to acquire a target company. The Court's decision raises fundamental issues for the companies involved, clarifying the necessary conditions for VAT incurred to be deductible.

Regulatory Context

As established by Articles 19 et seq. of Presidential Decree No. 633 of 1972, VAT deductibility is permitted provided that the taxable person holds the status of a taxpayer and that the goods and services purchased are used for VAT-subject operations. The Court examined a specific case where a special purpose vehicle (SPV) company, created to acquire the target company, had commissioned consulting services without exercising the right to deduct VAT. The Court ruled that these expenses were nevertheless linked to the future economic activity of the SPV company.

Principle Established by the Court

Operation of so-called "merger leveraged buy-out" – VAT Deductibility – Conditions – Factual Circumstances. In the context of a so-called merger leveraged buy-out operation, the value added tax due or paid by the so-called SPV company, if related to purchases of goods and services intended for the completion of the acquisition of the so-called target company, is deductible pursuant to Articles 19 et seq. of Presidential Decree No. 633 of 1972, provided that the company resulting from the merger holds the status of a taxable person for the tax it seeks to deduct and that the goods and services purchased are used by such taxable person in furtherance of its own VAT-subject operations.

The Court indicated that in the specific case, the acquisition of the target company was to be considered a preparatory operation for the economic activity that would be carried out after the acquisition. This means that the expenses incurred for the acquisition of shares were recognized as necessary for the concrete commencement of the SPV company's activity, making it a taxable person for VAT purposes.

Practical Implications of the Judgment

The implications of this judgment can be summarized in the following points:

• SPV companies can deduct VAT incurred for purchases related to acquisition operations, provided they are intended for future economic activity.
• It is crucial for businesses to carefully monitor expenses and ensure they are directly linked to taxable operations.
• Decisions of the Court of Cassation are binding and can influence the acquisition strategies and tax planning of companies.

Conclusions

Judgment No. 22608 of 2024 represents a significant step forward in understanding VAT deductibility in merger leveraged buy-out operations. Companies must pay close attention to how they manage expenses related to such operations, as deductibility can have a significant impact on their tax position. The Court has clarified that expenses incurred must not only be documented but must also demonstrate a direct link to future operations for companies to benefit from VAT deduction.