A decision yesterday by the European Court of Justice (ECJ) that tax can be reclaimed on costs related to the sale of new shares may force European governments to repay hundreds of millions of euros.
It could also open the way for class-action-style litigation by companies seeking additional refunds.
The ECJ's full court ruled that companies should be able to recover value added tax on the legal and accounting fees involved in issuing shares.
The closely watched case centred on Kretztechnik, an Austrian medical devices company and unit of General Electric, which is attempting to recover VAT on the legal and accounting fees incurred in its listing on the Frankfurt Stock Exchange in 2000.
The judgment in favour of the company has potential repercussions for all European Union member states that prevent companies from recovering VAT on the cost of share issues.
These include Austria, the UK, Republic of Ireland, Denmark, Finland, Greece and Luxembourg, according to Greg Sinfield, a partner of Lovells, a law firm.
It could also have implications for other types of financing transactions.
"It is likely that the judgment . . . will have a knock-on effect, leading to VAT on legal and professional fees incurred on bond issues and certain M&A transactions becoming recoverable," said Alan Sinyor of Freshfields Bruckhaus Deringer.
The ripples may not end there. At least one British law firm is considering launching a group litigation action, in an effort to push VAT refunds back beyond the standard three-year reclaim period in the UK.
McGrigors is planning to circulate a briefing note telling businesses that they would have to make a High Court claim to see whether they can go back beyond the three-year period.
According to the firm, the sums at issue could run into hundreds of millions of pounds for the immediate three-year period, and more if the claims were extended back further.
Any group litigation would potentially be open to any company - UK or foreign - which had listed on either the main stock market or the Alternative Investment Market.
"Because of the number of likely claimants, it is probable that the court would require the claims to be managed by way of group litigation," said the firm's briefing note.
A test case would be taken forward in order to determine all the common issues, while the remaining claims are stayed. Each party to the action would be required to contribute to the costs of the test claimant. There are obvious advantages to this - costs and risk will be shared."
Two years ago, a High Court judge ruled that claims for compensation after tax authorities made a "mistake of law" were not subject to the normal six-year limit on claims. In February of this year, the Court of Appeal disagreed, and the matter is now due to be decided by the UK's House of Lords. - (Financial Times Service)
