Dear FS professional,
Now that the end of the summer is approaching, why not ease back into business with some light reading in the form of our FS Tax Newsletter. The main topic this time is the introduction of the awaited bill on the tax treatment of additional tier 1 instruments issued under CRD IV. It will be interesting to see the developments in parliament in this regard, as the bill makes an exception to the general Dutch corporate tax system on debt and equity qualification, but only for instruments that are issued by banks. Exactly the same instrument issued by a Dutch corporate taxpayer that does not fall under CRD IV would be treated as equity for Dutch tax purposes, i.e. no deduction and even subject to withholding tax. My question would be whether this can pass the “EU smell test”. We will undoubtedly see lots of discussions on this in the coming months.
Niels Groothuizen, Partner, Financial Services Tax Group
Table of Contents
- 1. Bill on tax treatment of additional Tier 1 capital
- 2. Updated decree on real estate transfer tax
- 3. Uniform 40/60 VAT treatment of all-in fee for asset management services retail clients
- 4. Tax point rules for Dutch Insurance Premium Tax clarified
- 5. Cost sharing exemption no longer applies to pension administration as of January 1, 2015
1. Bill on tax treatment of additional Tier 1 capital
The bill on the tax treatment of additional Tier 1 capital was recently presented to the Lower House.
As a result of the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD IV), which both took effect as of January 1, 2014, additional Tier 1 capital issued after January 1, 2014 could, based on current tax legislation and case law, no longer be regarded as debt for tax purposes and consequently the remuneration on such instruments would also no longer be deductible. This means that Dutch banks would no longer be on an equal footing with banks in other European countries. As previously announced, the Deputy Minister of Finance wishes to correct this inequality.
A bill to amend legislation has recently been sent to the Lower House. Briefly put, the bill provides for additional Tier 1 capital to receive the same tax treatment as debt instruments (unless the instrument would legally be regarded equity, such as shares). Consequently, the return on such instruments will be taxed at the level of the investor, while the borrower will, in principle, be able to deduct the interest payable. It has been proposed to have the bill apply with retroactive effect to January 1, 2014.
Strangely enough, additional tier 1 instruments that were issued before 1 January 2014 but do not qualify debt for Dutch tax purposes based on current case law, will in principle not be covered by the new legislation, according to the legislator.
The government has indicated that it intends to present a similar bill with regard to Solvency II, as insurers must comply with almost exactly the same conditions as banks in respect of the holding of hybrid capital instruments.
If you have any questions, please contact Niels Groothuizen.
2. Updated decree on real estate transfer tax
The Deputy Minister of Finance has updated the decree on the taxable event in real estate transfer tax. The updated decree took effect on June 13, 2014. This decree contains an approval for dispensing with real estate transfer tax in certain situations. The Deputy Minister also addresses the issue of real estate transfer tax as it relates to the alternative sale and transfer system developed by the notarial practice. The most important features of the decree are discussed below.
Redemption of own shares by an investment company with variable capital
The redemption of own shares or the issue of shares by a real estate legal entity can be a taxable event for the purposes of real estate transfer tax. The Deputy Minister had already approved the granting, in certain circumstances and upon request, of a tax credit for the real estate transfer tax payable. One of the conditions for the tax credit is that the redeemed shares are withdrawn.
In practice, an investment company that redeems its own shares and that qualifies as a real estate legal entity cannot take advantage of the tax credit, because it usually does not immediately withdraw the redeemed shares, but retains them in its portfolio for reissue at a later date. The Deputy Minister does not consider it appropriate that real estate transfer tax is levied in all cases of share redemption. As such, he has given a conditional approval for the tax credit to also be granted to investment companies with variable capital that redeem their own shares, provided the balance, in a 12-month financial year, of the redeemed and reissued shares is withdrawn within two months of the end of this financial year. The new policy reduces the number of situations in which real estate investment companies have to pay real estate transfer tax.
Purchase and sale by a legal entity without legal personality
It is sometimes the case with domestic and foreign legal entities without legal personality (for example, a limited partnership (commanditaire vennootschap), a mutual fund (fonds voor gemene rekening) or a German Sondervermögen) that a portfolio manager/custodian acquires real estate fully or partly for the account of the partners/participants, as a result of which the legal and beneficial ownership of the real estate has to be split. The partners/participants acquire the beneficial ownership.
The manner in which this split arises has raised questions about who should pay the real estate transfer tax and how it has arisen. The Deputy Minister has given a conditional approval for real estate transfer tax to be dispensed with in respect of the acquisition of beneficial ownership and that therefore only the acquisition of legal ownership will be taxed. The new policy makes it easier to remit the real estate transfer tax payable on the purchase and sale of real estate through an entity without legal personality.
Alternative purchase and transfer system
The notarial practice has developed an alternative to the current sale and transfer system for real estate. Under this system, a notary draws up one notarial deed of sale, which also includes the transfer of the real estate and a number of suspensive conditions, the most important being the payment of the sale price, followed by the drawing up of the deed of discharge and its registration. In the decree, the Deputy Minister addresses some real estate transfer tax aspects of the alternative system.
Under the alternative sale and transfer system, the signing of the deed of sale and transfer only grants the buyer a right of transfer of the real estate. According to the Deputy Minister, the buyer has not yet acquired the beneficial ownership at that time and therefore real estate transfer tax is not yet payable when the sale and transfer deed is signed, unless the buyer acquires more than only the right of transfer. Under the alternative sale and transfer system, the acquisition for real estate transfer tax purposes takes place at the time the deed of discharge is drawn up and signed. It is then that real estate transfer tax is payable. The policy of the Deputy Minister clarifies how the alternative sale and transfer system will impact real estate transfer tax. This makes the system easier to apply in practice.
Our conclusion is that the decree provides more clarity on whether VAT or real estate transfer tax is payable in the abovementioned situations. Our specialist Annemiek van Dijk (+31 (0)20 6 561 246) would be pleased to help you determine whether one of the above situations applies to your business.
3. Uniform 40/60 VAT treatment of all-in fee for asset management services retail clients
In close consultation with the Dutch Banking Association, the Dutch tax authorities have approved that only 40% of an all-in fee for asset management services to non-professional investors is subject to VAT. The remaining 60% is VAT exempt.
The Dutch Banking Association (Nederlandse Vereniging van Banken –NVB) has discussed the VAT treatment of asset management services rendered to retail clients with the Dutch tax authorities. In a recent letter to the NVB, the Dutch tax authorities set out their position on such asset management services.
The Dutch tax authorities distinguish three types of investment services:
- Execution-only services: the bank executes transactions in securities upon request. Such transaction services are fully VAT exempt.
- Individual discretionary asset management services: the bank receives a mandate from clients to perform all necessary activities relating to securities transactions. The bank identifies investment opportunities and executes the transactions at its own discretion. These discretionary asset management services are fully VAT taxable.
- Asset management services: these activities fall between the execution-only services and the individual discretionary asset management services. The bank identifies interesting investment opportunities, but does not have a mandate from clients to execute the transactions at its own discretion. Each proposed investment must have the explicit approval of the client. If separate fees are charged for the transactions and the investment advice, no VAT is payable on the transaction fees. The advisory services are fully VAT taxable. If a bank charges an all-in fee for both services, VAT must be charged on 40% of this all-in fee.
The letter to the NVB actually reaffirms an old agreement between the NVB and the Dutch tax authorities on asset management services for retail clients, where 40% of the all-in fee for individual asset management services was VAT taxable. After the Court of Justice of the European Union rendered judgment in the ‘Deutsche Bank AG case’ (Case C-44/11), the Dutch tax authorities withdrew this agreement. The agreement that has now been concluded clarifies in more detail which services are VAT exempt, which are VAT taxable and which are eligible for 40/60 treatment. Although businesses are not obliged to adopt this agreement, it is recommended that they do so. Services offered in this area should be carefully reviewed to establish which VAT treatment applies, taking into account this new policy.
The 40/60 split can be applied as of July 1, 2013 until December 31, 2015 and will be evaluated during the first half of 2015.
4. Tax point rules for Dutch Insurance Premium Tax clarified
The Deputy Minister of Finance recently issued a decree in which he sets out how the tax point rules for Dutch Insurance Premium Tax (IPT) should be interpreted. Insurers, brokers and insurance agents are advised to check their documentation and systems to establish whether they report IPT in accordance with this decree, keeping in mind the increases in the IPT rate in 2011 (to 9.7%) and 2013 (to 21%).
Under Dutch IPT legislation, the tax point for IPT is set at the premium due date (premievervaldatum). “Premium due date” is not defined in tax law, but is generally understood as the date on which the premium is payable, as stated in the policy schedule document.
In his decree of June 30, 2014, the Deputy Minister clarifies the tax point as being the date on which the policyholder should ultimately have paid the premium. Where a policyholder is granted an extension for paying the premium, the tax point is then the last day of the extended period. Moreover, in the situation where, in addition to the premium due date in the policy schedule or renewal document, the premium is to be paid in installments, the tax point is set at the date on which these installments should have ultimately been paid.
We believe that this new guidance may be open to debate.
The decree is particularly important in light of the two Dutch IPT rate increases: from 7.5% to 9.7% in March 2011, and from 9.7% to 21% in January 2013. As these tax years are still open for assessment by the tax authorities, insurers, brokers and insurance agents should check their policy schedule documents, renewal documents, payment terms and systems in order to establish whether their IPT tax points are in accordance with the decree.
We can help with this analysis and assist you with any consultation that may have to take place with the Dutch tax authorities.
5. Cost sharing exemption no longer applies to pension administration as of January 1, 2015
As of January 1, 2015, the Dutch VAT cost sharing exemption can no longer be applied to services provided by pension administrators. As a result, the VAT burden on pension administration services may increase as of January 1, 2015. However, the recent judgment rendered by the CJEU in the ATP case may have created opportunities to partially apply the VAT exemption for the management of special investment funds to pension administration services.
As of January 1, 2015, the Dutch VAT cost sharing exemption can no longer be applied to services provided by pension administrators.
The cancellation of the Dutch VAT cost sharing exemption for pension administrators is part of the Dutch Pension Package. One of the main reasons for its cancellation is that the exemption is thought to distort the competition between providers of pension administration services. Such a distortion is contrary to the EU VAT Directive. As a result of the cancellation of this exemption, the VAT burden on pension administration services may increase, as Dutch pension funds generally cannot, or can only partially, reclaim the VAT on costs.
However, the impact of this cancellation (and thus also the calculated annual Dutch budgetary revenue of EUR 110 million) appears to be overestimated, because the other opportunities for lessening the VAT burden for pension fund administrators are currently already being utilized. The VAT burden is, for instance, lessened by i) having a VAT group in place between the pension fund administrator and the pension fund, or ii) having a (non-VAT) Costs for Joint Account agreement. Furthermore, the recent ATP case may have created opportunities to partially apply the VAT exemption for the management of special investment funds to pension administration services (please also refer to our VAT Alert on the ATP case that was brought before the CJEU). The ATP case has made the exemption for the management of special investment funds available to services relating to the operation of Defined Contribution schemes. As the discussion on the extent to which services such as pension administration rendered to pension funds qualify as VAT exempt ‘management’ is still ongoing, it is recommended that clients discuss the scope of the exemption with the Dutch tax authorities. Another issue that is under discussion is whether this exemption could also be applied by pension funds operating a Defined Benefit or a Collective Defined Contribution scheme. The Ministry of Finance has announced that it will publish its position on the consequences of the ATP case after the summer.