The Supreme Court has ruled that pension funds with a defined benefit (DB) plan, as in the case in question, cannot be regarded as a special investment fund within the meaning of the VAT-exemption. The management of this pension fund is therefore not VAT-exempt.
The case concerned the VAT treatment of asset management services, which a Dutch asset manager performs for an industry-wide pension fund for care and welfare sector employees (hereinafter: the Pension Fund). The Pension Fund administers the pension plan for employees in this sector. The pensions to be paid out are calculated on the basis of the average salary earned by the employees and the length of service by their employer (‘Defined benefit pension plan’).
The position taken by the asset manager is that the management it performs must be regarded as the management of a special investment fund that is VAT-exempt. This is also referred to as the VAT exemption for collective asset management.
The application of the VAT exemption for collective asset management was previously dealt with twice by the Court of Justice of the European Union (hereinafter: CJEU). In the Wheels case, the CJEU ruled that the pension fund involved could not be regarded as a special investment fund within the meaning of the exemption, while in the ATP case the CJEU ruled that a pension fund does qualify as a special investment fund if the pension fund is funded by the persons to whom the retirement benefit is to be paid, the funds are invested using a risk-spreading principle and the members of the pension fund bear the investment risk. It is therefore often unclear in practice whether a Dutch pension fund can be regarded as a special investment fund. The Supreme Court has now ruled on this for the first time.
Judgment of the Court of Appeals The Hague
The judgment by the Supreme Court follows on from the judgment rendered by the Court of Appeals The Hague on December 5, 2014 in cassation proceedings. The Court of Appeals The Hague ruled that the management of the assets of the Pension Fund is not VAT-exempt, because the Pension Fund cannot be regarded as a special investment fund.
According to the Court of Appeals, the character of the Pension Fund in question is fundamentally different to that of an undertaking for collective investment in transferable securities (hereinafter: UCITS). The main considerations taken into account in reaching this conclusion were:
- the Pension Fund does not operate for the sole purpose of investing its assets;
- the pension entitlements cannot be purchased or repaid directly or indirectly;
- the participants do not own the Pension Fund's investment products themselves; and
- it cannot be claimed that the participation risk is solely dependent on and is spread over a number of investments.
Supreme Court judgment
The Supreme Court concurs with the judgment of the Court of Appeals The Hague and ruled that the investment risk (and the consequences thereof for the size of the pension benefits) is not significant enough to equate it with the risk borne by participants in a special investment fund. According to the Supreme Court, the investment risk is not significant enough, given that the size of the pension benefits are initially determined by the length of service and the average salary. This is not altered by the fact that there is a risk that the pension entitlements and the pensions that have taken effect will not be indexed, or will be reduced. The Supreme Court considers this risk to be different from that of the risk of disappointing investment results for the participants in a special investment fund.
It is noteworthy that the Supreme Court did not follow the Opinion issued by Advocate General Ettema. The Advocate General had previously concluded (on February 23, 2016) in this case that she considered that the participants collectively bear the risk of non-indexation and reduction, because no other person (the employer, for example) bears that risk. According to the Advocate General, the criterion for regarding the Pension Fund as a special investment fund has therefore been met.
Another noteworthy aspect is that the Supreme Court in particular concurs with the reasoning in the Wheels case, in which the CJEU ruled that the members of the pension fund do not bear the risk associated with the management of that fund. The Supreme Court does not specifically address the conditions identified by the CJEU in the ATP case for a pension fund to qualify as a special investment fund. Important in this is that funds that are not a UCITS qualify as a special investment fund if they display characteristics identical to those of UCITS and thus carry out the same transactions or, at least, display features that are sufficiently comparable for them to be in competition with such undertakings. The Supreme Court does not, for example, specifically address the comparison between a UCITS and a pension fund, other than on the point of the investment risk.
We note in this respect that there are UCITSs that offer a capital guarantee product. Capital guarantee products oblige a UCITS to legally commit to repaying at least part of the contribution. The investor in such a UCITS therefore does not directly bear the entire investment risk, given that the capital guarantee product, in principle, assures investors that they will recover their contribution.
It follows from the Supreme Court judgment that the management services provided to Dutch pension funds will in many cases be VAT-taxed. Not only straightforward asset management services qualify as ‘management’; certain pension administration activities and investment advisory services also qualify as such, so that the judgment will have a broad impact.
We expect that the judgment will reinforce the position taken by the Ministry of Finance and the Dutch tax authorities that the exemption for collective asset management does not apply. Each pension plan is different, however. In our view, the ATP case litigated before the CJEU still offers enough arguments for applying the VAT exemption to pension plans with characteristics other than those of the Pension Fund in the present case. The judgment rendered by the Supreme Court is therefore certainly not the last word in this matter for all pension plans.
We should also not lose sight of the political debate about VAT and pension funds, which we expect will not end with this judgment. It may be that this issue will have to be discussed further at the EU level, given the differences between the various EU Member States.
In practice, we consider that it is still essential to examine all the facts and circumstances in order to determine whether a VAT exemption can be applied. A relevant factor in determining whether participants run a significant investment risk is, for example, whether the employer must pay a recovery contribution in the event of underfunding.
We expect that the Dutch tax authorities will use the Supreme Court judgment to ask taxpayers to further substantiate any filed notices of objection or even to withdraw them. If a notice of objection has already been filed, we recommend that you review it, based on the Supreme Court judgment, to see whether the conditions for applying the VAT exemption have been met. Depending on the specific characteristics of the pension plan, you could, on that basis, also consider instigating legal proceedings.
The tax advisors of the Indirect Tax Financial Services Group at Meijburg & Co would be pleased to help you assess whether the conditions for applying the VAT exemption have been met, to draft a more detailed substantiation of the filed notice of objection, as well as assist you with any follow-up action. They would also be pleased to answer any general questions about the impact of this judgment. Feel free to contact one of these tax advisors or your regular contact at Meijburg & Co if you have any questions or comments.