VAT in MLBO Transactions: Deduction and Cost Recovery for Vehicle Companies.

Merger leveraged buyouts (MLBOs) are a complex financial process in which a special purpose vehicle (SPV) temporarily acquires a “target” company and then merges with it, establishing control. This structure makes the SPV a taxable person for VAT purposes, and thus makes it eligible to deduct VAT on costs incurred prior to the merger.

What is an MLBO and How SPV Works.

An MLBO allows an SPV to finance the acquisition of the “target” with borrowed capital, hence the term “leveraged.” However, the acquisition of the “target” represents a transitional phase, aimed at a final merger between the SPV and the target company itself, forming a single controlled entity. This structure justifies the SPV ‘s VAT liability, with the possibility of deducting VAT paid on purchases functional to the merger, even if incurred before the completion of the transaction.

Deduction of VAT in MLBO Transactions

La judgment no. 22608/2024 set an important precedent for special purpose vehicles, confirming that expenses made in anticipation of the merger are deductible as a VAT credit. To obtain the refund, companies can use the Application under Article 30-ter of Presidential Decree 633/72. , which covers:

• Provision of services from nonresidents through the reverse charge mechanism, as stipulated in Ruling No. 22608/2024.
• Internal purchases made directly by the SPV.

Reverse Charge for Benefits Received from Foreign Subjects

In the case of services received from foreign suppliers, VAT is not paid directly but is accounted for through the reverse charge mechanism. This process is also applicable to purchases made by SPVs, allowing these services to be included in the VAT refund claim. Therefore, purchases made prior to the merger can be included in the VAT credit if intended for merger under the MLBO.

VAT Recovery and Refund Credit

SPVs that undertake an MLBO are entitled to recover VAT on purchases through a claim for refund under Article 30-ter of Presidential Decree 633/72. This allows them to effectively manage expenses and maintain the financial balance of the operation, ensuring liquidity at a crucial time for the SPV.