The District Court in The Hague recently rendered judgment in a case concerning the recharging of advisory fees by a bank. The bank had deployed an external advisor in connection with the furnishing of loans to one of the bank’s customers. In the Court’s opinion, the recharging of these fees qualifies as the VAT exempt extension of credit and thus no VAT is payable.

The case
A general partnership (vennootschap onder firma; “VOF”) was in financial difficulty and engaged a bank to prepare a rescue and finance package, which resulted in credit being provided. The bank had engaged an advisory firm to provide legal services. The advisory firm charged the bank for its services and the bank, in turn, recharged these fees to the VOF, including Dutch VAT. The tax inspector rejected the recovery of the VAT that the bank had charged to the VOF.

District Court judgment
The District Court of The Hague (“the District Court”) ruled in favor of the tax inspector. It concluded that the VOF had failed to prove that the advisory firm had provided services directly to the VOF. The advisory firm’s invoice, in fact, suggested the opposite: the bank was listed as the client. Moreover, the services provided by the advisory firm consisted primarily of consultation with the bank and the drawing up and revising of deeds of pledge, mortgage deeds and the loan agreement. The fact that the VOF's bank account was used to pay the invoice, did not mean that the advisory firm provided its services directly to the VOF. The District Court subsequently concluded that the VOF failed to convincingly demonstrate that the recharging of the advisory fees was the payment for the individual service on which Dutch VAT was charged. The VOF also failed to demonstrate that what it had agreed with the bank involved more than only the granting of credit, for which the bank is allowed to recharge the costs to the VOF. The District Court concluded that the bank only provided one service to the VOF, and that this service qualified as VAT exempt granting of credit. The bank therefore incorrectly charged Dutch VAT on the invoice it issued to the VOF. For this reason, the VAT is non-deductible.

It has been confirmed that an appeal has been lodged against the decision of the District Court.

How to proceed?
Banks and private equity firms often engage several advisors when furnishing or refinancing loans to businesses. Sometimes specific agreements are made regarding the fees charged by these advisors, or reference is made to general terms and conditions (as was the case in the above proceeding). It is worthwhile to determine in advance the VAT consequences of those agreements. In practice, the financing/refinancing process often takes place under severe time pressure, with no room to determine its consequences in advance. In that case, the borrower will have to establish how the refinancing costs should be treated for VAT purposes when accounting for these costs. This will avoid an excessive amount of VAT being incorrectly recovered or an excessive amount of reverse charged VAT being remitted.

In case you have any questions or would like to receive further information in relation to this topic, please feel free to contact one of the members of the Indirect Tax Financial Services Group of KPMG Meijburg & Co, or your regular tax advisor.