The Finnish Supreme Administrative Court recently ruled that M&A transaction costs must be apportioned between the acquiring company (BidCo) and its owner, particularly in cases where a private equity (PE) fund establishes a Finnish company to act as the acquirer in an M&A transaction (BidCo).
Fully deductible VAT costs: VAT on advisory services related to the following services remains fully deductible by the BidCo:
- Drafting of the share purchase agreement;
- Securing BidCo’s own financing; and
- Planning of BidCo’s business operations.
Apportioned costs: Certain costs must be divided between BidCo and its owners (typically a PE fund), with BidCo being able to deduct VAT only on the portion of services directly benefiting its operations. These shared costs may, according to the ruling, include services related to following matters:
- Due diligence;
- Market research;
- Valuation services;
- Project management and deal structuring;
- Assessments of future prospects and industry risks;
- Closing-related services; and
- Regulatory approvals.
The taxpayer bears the burden of proof to demonstrate the benefit to the BidCo and the appropriate allocation of these costs. The ruling did not take any position on the proportional amounts that could be attributed to BidCo, i.e. the apportionment needs to be done based on objective criteria reflecting BidCo’s benefit of the services. This is expected to be a challenging task.
Non-ceductible costs: VAT on costs allocated to the owners of BidCo (PE fund) is not deductible for BidCo. These include, as a starting point, services related to following matters:
- Investment decisions of the PE fund;
- Planning of the group structure above BidCo level;
- Arranging the PE fund’s financing; and
- Drafting shareholders’ agreements.
For more information, please contact Sebastian Kellas, Antti Leppänen and Janina Järvi.