FS Tax Newsletter | April 2021
Dear FS professional,
Now that the winter has ended and the weather is slowly getting better, we are issuing our second FS Tax Newsletter for 2021. In this issue we summarize relevant developments that took place during February and March of this year.
The first two items we look at concern EU case law: the Court of Justice of the European Union (‘CJEU’) rendered its important judgment in the Danske Bank case regarding permanent establishments and VAT groups. We briefly discuss this case and the significant impact it could have on internationally operating financial service providers. The second item included is the CJEU’s judgment in the German Q-GmbH case on the scope of the VAT insurance exemption, which could put pressure on the current Dutch practice.
The third and fourth items included in this newsletter concern two internet consultation procedures that were launched on March 4, 2021: the first procedure deals with the taxpayer status measure for reverse hybrid entities, which as part of the Second EU Anti‑Tax Avoidance Directive (ATAD2) must be transposed into national legislation as of January 1, 2022. The second procedure was launched on a bill to combat mismatches when applying the arm’s length principle. The draft bill focuses on informal capital arrangements.
Finally, we discuss changes to Dutch regulations resulting in potential FATCA and CRS obligations for family or small circle investment entities.
If you would like to know more about the matters addressed in this newsletter please contact us.
Niels Groothuizen, Partner, Financial Services Tax Group
Table of Contents
- 1. CJEU Danske Bank: VAT on services provided by a head office to a fixed establishment as a result of a VAT group
- 2. CJEU Q-GmbH: license to use an insurance product and any ancillary mediation subject to VAT
- 3. Internet consultation on taxpayer status measure for reverse hybrid entities
- 4. Mismatches in non-arm’s length transfer pricing tackled
- 5. Investing through an entity in a small or family circle? Qualification entity FATCA / CRS and obligations
1. CJEU Danske Bank: VAT on services provided by a head office to a fixed establishment as a result of a VAT group
On March 11, 2021 the Court of Justice of the European Union (‘CJEU’) rendered judgment in the Danske Bank case (case no. C-812/19). In this case the CJEU ruled that the services provided by a Danish head office to its fixed establishment in Sweden are subject to Swedish VAT, because the Danish head office is part of a VAT group in Denmark.
The Dankse Bank case can be placed in the same context as the Skandia Judgment. The latter concerned the VAT treatment of cross-border services from a head office to a fixed establishment, where the fixed establishment was part of a VAT group. In the Skandia judgment the CJEU ruled that services performed by the head office of Skandia in the United States for its fixed establishment in Sweden, which was part of a VAT group in Sweden, constituted VAT-taxable services. In essence, the CJEU ruled in this case that the fact that the fixed establishment is part of a VAT group in Sweden means that for VAT purposes there are services between two separate taxable persons.
The Skandia judgment left uncertainty within the EU about whether or not services between a head office and a fixed establishment are taxable if it is not the fixed establishment, but the head office, that is part of a VAT group. In the Danske Bank case, the Swedish court asked the CJEU to render a preliminary ruling on this question. The CJEU has now ruled that the provision of services between the Danish head office of Danske Bank and its Swedish fixed establishment are subject to VAT. The CJEU thus follows the line taken in the Skandia case.
To date, the Netherlands has taken the position that the Skandia judgment has no effect in the Netherlands. This line is applied in practice and was recently reconfirmed by the Deputy Minister of Finance in the new policy statement on VAT fixed establishments of December 18, 2020.
In the Danske Bank situation where there is a Dutch fixed establishment with a foreign head office that is part of a VAT group there, the question that arises is whether in future the existence of the foreign VAT group must be taken into account or that current practice can be continued, in which the existence of a VAT group is in fact ignored.
The impact of the Danske Bank case may be viewed differently by the various Member States. It could very well be that the positions that the various Member States take will differ. This was also the case with the Skandia judgment. From an administrative perspective, the impact may be significant for VAT taxable persons operating internationally via fixed establishments and with a VAT group in one or more Member States. The potential effects on ERP systems will also have to be examined.
The Danske Bank case may impact the playing field in the Netherlands and in other EU Member States. Certain internal or external costs that are currently recharged without VAT within the group, may in future be subject to VAT. If an entity within your group is established in more than one EU Member State (head office with fixed establishments), we recommend examining the impact of the Danske Bank judgment in each of those Member States. The Danske Bank judgment also creates an additional administrative burden for VAT taxable persons. For example, you may not only have to review your business model, but also your ERP systems, VAT processes, procedures and control mechanisms and change them where necessary.
For more information on this matter, please follow this link or contact Gert-Jan van Norden, Irene Reijniers or Niels Wenting.
2. CJEU Q-GmbH: license to use an insurance product and any ancillary mediation subject to VAT
On March 25, 2021 the Court of Justice of the European Union (‘CJEU’) rendered judgment in the German Q-GmbH case (no. C-907/19). In this case the CJEU ruled that the granting of a license by an underwriting agent to an insurer to use an insurance product is – in itself – subject to VAT.
Under the EU VAT Directive, insurance and reinsurance transactions and related services, performed by insurance brokers and insurance agents are exempt from VAT. There is a VAT-exempt insurance activity if: (i) the insurer (ii) in exchange for the prior payment of a premium (iii) undertakes to pay the insured (iv) in the event the insured risk occurs (v) the payment (vi) agreed when the contract was concluded (in other words: provide insurance). Insurance-related services are present if (i) the service provider has a relationship with both the insurer and the insured and (ii) performs activities essential to the function of an insurance intermediary, such as finding prospective clients and introducing those new clients to the insurer (in other words: insurance mediation).
It seems to follow from the operative part of the judgment that the granting of an insurance license in combination with insurance mediation services is subject to VAT. This judgment could put pressure on the Dutch practice, where a combination of mediation and other services closely related to insurance that are performed as a single supply are regarded as fully VAT-exempt. However, the operative part of the judgment requires nuance. The request for a preliminary ruling took as fact that the granting of the license is the principal service, although as far as we are concerned this could also be an ancillary service, depending on the facts. Furthermore, the CJEU has given a very explicit instruction to the German court to re-assess whether there is a composite service. As far as we are concerned, this nuance limits the impact of this judgment.
For more information on this matter, please follow this link or contact Gert-Jan van Norden, Jochum Zutt or Nienke van den Blink.
3. Internet consultation on taxpayer status measure for reverse hybrid entities
On March 4, 2021 the Deputy Minister of Finance launched, a public internet consultation on the taxpayer status measure for ‘reverse hybrid entities’ (also known as the ‘reverse hybrid rule’) and several related accompanying measures including for the purposes of dividend withholding tax and the withholding tax on interest and royalty payments.
Under the draft bill, a reverse hybrid entity is a partnership entered into under Dutch law or established in the Netherlands that is not regarded as an independent taxpayer for Dutch tax purposes (‘transparent) and of which directly or indirectly at least 50% of the voting rights, equity interests or profit rights are held by an entity affiliated to that partnership, which is established in a state that regards the entity as an independent taxpayer (’non-transparent’). reverse hybrid entities become fully resident taxpayers for corporate income tax purposes. This means, among other things, that reverse hybrid entities will be regarded as carrying on a business with their entire equity and that they will be regarded as a treaty resident of the Netherlands (which means they are, in principle, also entitled to treaty benefits).
To avoid double taxation, it is proposed that insofar as the profit of a reverse hybrid entity is directly allocable to holders of profit rights resident or established in a state that regards that entity as transparent, that profit share may be deducted from the profit. The taxpayer status measure does not apply to designated undertakings for collective investment in transferable securities (UCITS) and alternative investment institutions/
To ensure that distributions by a reverse hybrid entity can be subject to Dutch dividend withholding tax, the draft bill contains several (definition) changes to the Dividend Withholding Tax Act 1965 and the General Taxes Act (GTA). To ensure that interest and royalty payments made by reverse hybrid entities fall within the scope of the Withholding Tax Act 2021, several (definition) changes to the Withholding Tax Act 2021 and (once again) the GTA are proposed.
For more information on this matter, please follow this link or contact Otto Marres or Bauco Suvaal.
4. Mismatches in non-arm’s length transfer pricing tackled
On March 4, 2021 a public internet consultation was launched on a bill to combat mismatches when applying the arm’s length principle. The bill focuses on informal capital arrangements. The public consultation will end on April 2, 2021.
The arm’s length principle that applies in the Netherlands for corporate income tax purposes requires affiliated taxpayers to do business using prices that would have been agreed by independent third parties under comparable conditions and make adjustments for tax purposes if those prices are not adhered to. This could lead to mismatches in international relationships if a downward adjustment of the profit for tax purposes in the Netherlands does not involve a corresponding upward adjustment that is included in the tax base in the other country.
Based on the bill launched for public consultation, downward adjustments of the Dutch profit for tax purposes on the basis of the arm’s length principle in transactions between affiliated entities will may only be taken into account insofar as the taxpayer can convincingly demonstrate that a corresponding upward adjustment is subject to profit tax at the other (affiliated) entity with which the legal relationship was concluded. While it is required that that a corresponding upward adjustment is subject to profit tax, the consultation document states this is met if a country has a profit tax and the amount of the corresponding upward adjustment is included in the tax base in that country. That may also be the case if the corresponding upward adjustment is subject to tax at a 0% rate.
The bill that was launched for public consultation also contains rules for assets acquired in financial years commencing on or after January 1, 2022. A separate rule applies for assets acquired before the first financial year commencing on or after January 1, 2022.
Informal capital arrangements (including deemed dividend) have been under scrutiny for some time in the light of international tax mismatches. The bill opened for public consultation has a certain substantive retroactive effect due to the depreciation limitation for assets acquired in the five financial years preceding the first financial year commencing on or after January 1, 2022. The public consultation closes on April 2, 2021. If consent is given, the responses will then be published. After the public consultation, the responses can be included in the drafting of the final bill.
For more information on this matter, please follow this link or contact Michael van Gijlswijk or Tom Noë.
5. Investing through an entity in a small or family circle? Qualification entity FATCA / CRS and obligations
Through implementation into Dutch regulations, the Common Reporting Standard (CRS) and Foreign Account Tax Compliance Act (FATCA) create obligations for Dutch entities that qualify as a Financial Institution (FI) under these regulations. These obligations may include having to register with the Internal Revenue Service (IRS) in the United States and with the Dutch tax authorities, to investigate and identify its (foreign) account holders in accordance with CRS and FATCA rules and annual reporting obligations to the Dutch tax authorities regarding its foreign account holders.
Following a recommendation by the OECD, the Netherlands has withdrawn (with retroactive effect to June 23, 2020) an exception for entities in the Netherlands, of which the assets consist of cash or investments and which have a (very) limited group of direct or indirect shareholders or participants that belong to one family. Previously, under certain conditions these entities were not classified as an FI but as a Passive Non-Financial Entity (Passive NFE). According to the amended Dutch guidance, these entities are no longer exempt from the aforementioned obligations. These FIs may have to report certain information about their foreign account holders annually and for the first time no later than August 1, 2021.
For more information on this matter, please contact Michèle van der Zande, Jenny Tom or Bastiaan Blom.