On December 5, 2014 the Court of Appeals of The Hague ruled that the asset management services provided to a Dutch pension fund were not VAT exempt. This judgment is not only important for pension funds, but also for asset managers and other service providers.
1. The Case
The case concerned asset management services that a Dutch asset manager provided to a sectoral pension fund. The employees are obliged to participate in the pension fund by virtue of their employment contract. This involves a defined benefit agreement, which entitles the employee to a pension.
This case provided a Dutch court with the opportunity to rule, for the first time, on the consequences of the judgment rendered by the Court of Justice of the European Union (CJEU) in March 2014 in the ATP case. At issue in the present case was whether the sectoral pension fund qualifies as a special investment fund for VAT purposes. In that case, the asset management services would be VAT exempt.
2. Judgment of the Court of Appeals The Hague
In short, the Court of Appeals ruled that the nature of the pension fund in question is fundamentally different to that of a special investment fund, so that it cannot be regarded as a special investment fund within the meaning of the VAT exemption. Some of the considerations influencing this conclusion were:
- According to the Court, the pension fund is not operated solely to invest its assets; the primary objective is related to the insurance aspect. In the Court’s opinion, the return on investment only serves to facilitate the insurance payments.
- Although the Court recognized that the pension fund was indeed an institution in which the amassed investments are managed with the aim of realizing an optimal return, it could not be said that the participants, themselves, own the investment products of the pension fund. The financial risk run by the participants is not solely dependent on investments (participants are, for example, bound by the statutory funding ratio when indexing the benefit payments).
- The Court furthermore concluded that the participants are entitled to a pension benefit that is subject to time limits and as such they are not entitled to a fixed part of the capital (for example, the entitlement to a benefit in the event of premature death is severely restricted).
Because the pension fund did not qualify as a common fund, the taxpayer in the present case could not apply a VAT exemption to the asset management services it provided to the pension fund.
In the judgment rendered in March 2014 in the ATP case, the CJEU provided a number of criteria for determining whether a pension fund qualifies as a special investment fund. One of the criteria was that the investment risk must be borne by the participants. It should be noted here that the pension plan in the ATP case had the hallmarks of a Defined Contribution plan (“DC plan”). In its judgment, the Court of Appeals of The Hague noted that the risk for employees of participating in the pension fund was not only dependent on a number of investments. As such, the Court appears to imply that the particular criterion referred to in the ATP case has not been met.
However, it is debatable whether the risk run by the employees should only be dependent on investments, or whether a more limited investment risk can suffice. Based on the facts, it would appear that in the case of inadequate cover it can ultimately be decided to reduce the pension benefits and entitlements. This makes clear that the participants do run a risk, at least with regard to the return on investment. Seen from this perspective, the criterion stipulated in the ATP judgment would be met.
In September 2014, the Deputy Minister of Finance set out in a letter how he thinks pension funds should be distinguished:
- the operation of pension funds that administer Defined Benefit plans (a “DB plan”) is taxable (it is clear from his letter that the Deputy Minister regards the pension fund in the case at hand as having a DB plan);
- the operation of pension funds that administer individual DC plans is exempt;
- the operation of pension funds that administer collective DC plans: the facts and circumstances will determine whether or not this is taxable.
Each pension plan is different, however. Moreover, the ATP judgment leaves enough room to argue for a VAT exemption in all the above three categories. The judgment rendered by the Court of Appeals of The Hague is definitely not the last word in this matter. 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, even if the pension fund in question operates a DB plan. Pension funds that engage the services of pension administrators that can no longer apply the VAT exemption for cost-sharing groups as of January 1, 2015, would be well-advised to undertake steps in response to the ATP judgment.
4. What are your options?
Many pension funds, as well as the service providers of pension funds, will already have filed notices of objection in response to the ATP judgment. If you have not already done so, then we recommend that you do this now. This applies not only to pension funds and asset managers, but also, for example, to pension administrators, investment advisors and other consultants. In particular, pension funds that use the pension administration services provided by pension administrators that can no longer apply the VAT exemption for cost-sharing groups as of January 1, 2015, are well-advised to take action.
We expect that the Dutch Tax and Customs Administration will use this judgment to request taxpayers to substantiate the filed notices of objection in more detail or even to withdraw them. Because the Court of Appeals judgment will be appealed before the Supreme Court, we recommend that you consult with the tax inspector in order to stay the pending notices of objection. Depending on the circumstances, you could also consider instigating legal proceedings.
The tax advisors of the Indirect Tax Financial Services Group at Meijburg & Co would be pleased to help you draft a notice of objection or a more detailed substantiation of the filed notice of objection as well as assist you with any follow-up action. Feel free to contact one of these tax advisors or your regular contact at Meijburg & Co if you have any questions or comments.