Merger Leveraged Buy-outs And VAT Deductibility Of Transaction Costs In Italy

The Italian Revenue Agency’s Resolution No. 7/2026 clarifies the value-added tax (VAT) treatment of transaction costs incurred by a special purpose vehicle (SPV) in merger leveraged buy-out (MLBO) transactions. It focuses on (i) the SPV’s VAT status, and (ii) the classification of acquisition and advisory costs as expenses related to an economic activity for VAT purposes.

Under Article 19 of Presidential Decree No. 633/1972, implementing the VAT Directive, the right to deduct input VAT requires: (1) qualification as a taxable person, and (2) a direct and immediate link between the inputs and taxable outputs. Pure holding companies that merely hold participations without managerial involvement are excluded from taxable person status and cannot deduct VAT. Administrative practice had extended this restrictive view to MLBO SPVs, emphasising the shareholding phase.

Resolution No. 7/2026 aligns Italian practice with Court of Justice of the European Union (CJEU) case law on preparatory expenses. In Sonaecom (C‑42/19), the Court held that investment expenditure incurred to commence a taxable activity may give rise to taxable person status and deduction, where a direct and immediate link with the intended activity exists. Economic activity can consist of preparatory acts, provided that an intention to carry out taxable transactions is demonstrated by objective evidence.

The Resolution also relies on recent Supreme Court decisions reconstructing the MLBO as a structurally unified sequence: incorporation of the SPV, leveraged acquisition of the target, and subsequent merger. The acquisition of the shares is merely instrumental and transitional. The merger is the functional cornerstone that combines the acquisition debt with the target’s assets, and the SPV is not a static holding company, but an operational vehicle meant to carry on the target’s business. Acquisition costs are therefore preparatory expenses of the business activity of the post‑merger entity, justifying taxable person status and input VAT deduction.

In this perspective, the SPV plays a preliminary and preparatory role in relation to future economic activity, and transaction costs (financial and legal advisory, due diligence, tax and notarial fees) are functionally linked to the taxable activity carried out after the merger. The direct and immediate link is assessed substantively and prospectively, not on a merely formal basis. The SPV thus qualifies as a taxable person, and input VAT on transaction costs is deductible, provided an objective link with future taxable transactions is established.

However, the right of deduction presupposes that the MLBO genuinely aims to continue the target’s economic activity, that the merger is not merely hypothetical, and that objective elements confirm the intention to carry out a taxable activity. Otherwise, the SPV may again be classified as a static holding company, with denial of taxable person status and deduction.

Resolution No. 7/2026 consolidates a more neutral and substance‑oriented approach to VAT on MLBO transaction costs, overcoming formalistic views centred on mere shareholding and enhancing legal certainty in private equity and restructuring practice.