The Dutch Tax Authorities have recently been pro-actively approaching holding and financing companies to question their entitlement to deduct VAT. In a number of cases this has led to substantial supplementary VAT assessments being imposed. We have reservations about the limitations the Dutch Tax Authorities sometimes place on the deduction of VAT. In light of the potential impact this can have financially, it is advisable to ensure that the VAT risks run by holding companies as a result of the approach taken by Dutch Tax Authorities are identified on time.
Establishing whether a holding company is entitled to deduct VAT can sometimes be quite complex. We have noticed that the Dutch Tax Authorities have recently been proactively approaching holding and financing companies to question their entitlement to deduct VAT. Their focus is (also) on holding companies that, in addition to holding shares, provide services, such as management services or the provision of interest bearing loans. The Dutch Tax Authorities in particular questions whether the holding company can be ‘split’ into an ‘economic’ and a ‘non-economic’ part. It quite easily regards the passive holding of shares by a holding company as a non-economic activity. Case law of the Court of Justice of the European Union (the Securenta judgment, case no. C-437/06) makes such a split possible and up to a point allows EU Member States to themselves determine which VAT deduction method to apply in this. In practice, the Dutch Tax Authorities broadly opts for the following methodology:
- VAT on costs attributable to the non-economic part is, in principle, non-deductible.
- VAT on costs attributable to the economic part is deductible based on the statutory VAT deduction rules. The general rule in that case is:
1. VAT attributable to VAT taxable supplies is fully deductible;
2. VAT attributable to VAT exempt supplies is, in principle, non-deductible; and
3. VAT that can be allocated to both VAT taxable and VAT exempt supplies is deductible in
proportion to the remuneration for both supplies (‘pro rata VAT deduction’).
- VAT on costs attributable to both spheres (the economic and non-economic parts) is deductible based on a ‘pre-pro rata’ deduction rate.
The approach adopted by the Dutch Tax Authorities
The Dutch Tax Authorities usually suggest a pre-pro rata calculation method, although it does allow the taxable person and its advisor to apply another allocation formula. Other issues that may be questioned by the Dutch Tax Authorities are, for example, the substance of the holding company, the extent to which the management services provided reflect economic reality, the financial transactions performed by the holding company (such as providing guarantees or granting loans) and the disposal of participations. In a number of cases this approach has led to substantial supplementary VAT assessments being imposed. By precisely and accurately identifying the facts and carefully analyzing them, it has appeared possible in some cases to considerably reduce the supplementary VAT assessments. Moreover, from experience we know that the Dutch Tax Authorities are prepared to make agreements about the VAT position of the holding company. This means that certainty can also be obtained for the future on, for example, the treatment of certain costs and the filing of the holding company’s VAT returns.
In light of the potential impact this can have financially, it is advisable to ensure that an accurate picture of any VAT risks that holding companies may be exposed to as a result of the approach taken by the Dutch Tax Authorities is obtained in good time. We have reservations about the limitations that the Dutch Tax Authorities sometimes place on the deduction of VAT in their discussions with taxable persons especially in light of the Holding Resolution (dated February 18, 1991, no. VB91/347), a number of CJEU judgments and several pending European cases. The Holding Resolution contains a number of approvals/concessions that we believe can provide a basis for adopting another perspective on the VAT deduction position of holding companies. Incidentally, the Holding Resolution is expected to be amended or withdrawn, possibly quite soon. In light of these developments, the VAT position of holding companies will continue to remain a topical issue and we recommend that attention be paid to it. Should the Dutch Tax Authorities impose a supplementary VAT assessment, we advise filing a notice of objection in order to preserve your rights. Meijburg & Co’s VAT advisors would be pleased to help you analyze your VAT position as well as assist with pending discussions or audits.