Dear FS professional,
While some of you are (hopefully) able to enjoy some time off, we would like to provide you with some food for thought on the developments that have taken place in the financial services sector this summer. This edition of our FS Tax Newsletter includes the decision by the Court of Justice of the European Union (“CJEU”) that non-deductibility of currency loss on foreign shares does not breach EU law and, of course, the confirmation by the CJEU that the provision of a warranty could be regarded as a VAT exempt insurance. If you would like to discuss the items included in this newsletter (or other FS related topics) in more details, please contact one of our FS tax professionals.
Partner, Financial Services Tax Group
Table of Contents
- 1. Dutch Supreme Court decision July 10, 2015 on Luxembourg investment fund
- 2. CJEU: warranty may be VAT exempt insurance
- 3. VAT exemption for negotiation in securities
- 4. Calculation partial recovery of input VAT
- 5. CJEU decides that non-deductibility of currency loss on foreign shares does not breach EU law
- 6. OECD releases Country-by-Country (CbC) Reporting Implementation Package (BEPS Action 13)
1. Dutch Supreme Court decision July 10, 2015 on Luxembourg investment fund
According to the Dutch Supreme Court, Dutch dividend withholding tax is a final tax for a non-resident individual investing in Dutch shares. If a Luxembourg investment fund would be entitled to a refund of the Dutch withholding tax incurred on its Dutch investments, participants in the Luxembourg fund would pay less tax than if they had invested directly in Dutch shares.
A Luxembourg investment fund received Dutch portfolio dividends on which Dutch dividend withholding tax was levied and the investment fund was exempt from tax in Luxembourg. The fund claimed a full refund of the Dutch dividend tax withheld on its investments in Dutch companies. The fund considered itself to be comparable with a fiscal investment institution (in Dutch: fiscale beleggingsinstelling; “FBI” ). An FBI is effectively tax exempt in the Netherlands and entitled to a credit/refund of the dividend withholding tax incurred on its investments when it pays out dividends to its participants. Therefore, an FBI does not suffer a Dutch dividend withholding tax burden.
The Luxembourg investment fund claimed that the difference in tax treatment results in an infringement of the free movement of capital (Article 63 TFEU) as it was not entitled to a refund. The Dutch Supreme Court did not rule in favor of the Luxembourg investment fund and denied the request for a refund of the Dutch dividend withholding tax.
The Supreme Court ruled as follows. Dutch dividend withholding tax is a final tax for a non-resident individual investing in Dutch shares. If a Luxembourg investment fund would be entitled to a refund of the Dutch withholding tax incurred on its Dutch investments, participants in the Luxembourg fund would pay less tax than if they had invested directly in Dutch shares. In the latter case there is a 15% Dutch withholding tax, whereas there is no Dutch or Luxembourg withholding tax on dividends distributed by the Luxembourg fund. Therefore, the Luxembourg fund is not objectively comparable with a Dutch FBI.
The outcome of this case is in our view disappointing as it does not resolve the distortion within the internal market of the EU. The reason for this is illustrated by the following example:
Dutch resident investors – who are taxed on the dividends they receive – will be less inclined to invest through a non-Dutch investment fund. In the event of a dividend of 100 and 15% Dutch withholding tax, the Dutch investor would be taxed on 100 dividend and entitled to a tax credit of 15. If he invests through a foreign fund he is taxed on 85 but has no tax credit of 15. The outcome is the same in the event of participants resident in another Member State of the EU, where the withholding tax is creditable against the personal or corporate income tax. If you would like to receive more information about this case, please contact Robert van der Jagt.
2. CJEU: warranty may be VAT exempt insurance
On July 16, 2015, the CJEU ruled that the provision of a warranty could be regarded as a VAT exempt insurance. Under certain circumstances, however, this warranty may be so interconnected with the sale of a product that these transactions must be regarded as a single VAT taxed supply for VAT purposes.
On July 16, 2015, the CJEU rendered its judgment in the French case Mapfre Asistencia and Mapfre Warranty SpA versus Directeur général des finances publiques. In this case, the CJEU broadly interprets the VAT exemption for insurance. The CJEU ruled that the provision of a warranty (on secondhand cars) for a particular period at a predetermined fixed price must be regarded as an exempt insurance for VAT purposes. Under certain circumstances the warranty and sale of a product may be so interconnected that the sale of the product and the warranty must be regarded as a single VAT taxed transaction for VAT purposes.
The outcome of the Mapfre case is important for the scope of the VAT term ‘insurance’, especially in cases where it is agreed that repair services are performed on goods for a fixed amount in the case of mechanical defects. An important aspect then appears to be that the party that “guarantees” the repair services for a fixed fee is not the manufacturer/seller of these goods. The CJEU leaves room for the warranty to be regarded as (part of) a VAT taxed service in, for example, the situation where the manufacturer/ seller of the insured good buys and resells the warranty in its own name and for its own account. In 2012 the Dutch Supreme Court ruled that the simultaneous sale of a warranty certificate and the supply of a good by the same supplier must be regarded as a single VAT taxed supply (Supreme Court August 10, 2012, case No. 10/03633).
If an insurance policy is involved, then – in the Netherlands, as in most EU countries – no VAT is payable, but insurance premium tax is in principle payable. Also in that case, it will have to be examined whether the insurance VAT exemption precludes the right to recover VAT on repair costs, and whether this consequence can be mitigated by assuming insurance in cash rather than insurance in kind.
3. VAT exemption for negotiation in securities
Within the Financial Services sector, the question whether (advisory) services provided in the area of corporate restructuring may be regarded as VAT exempt ‘transactions including negotiation in securities’ has received more attention of late.
Within the Financial Services sector, the question whether (advisory) services provided in the area of corporate restructuring qualify as VAT exempt ‘transactions including negotiation in securities’ has received more attention of late.
In the Netherlands, the Supreme Court ruled in 2001 that the services of an investment bank, including various analyses prepared in anticipation of a share transaction, but also involvement in the negotiation of this share transaction, did not – as a whole – qualify as VAT exempt negotiation in securities. The Dutch tax authorities have therefore been reluctant to accept the VAT exempt treatment of any such similar services performed by investment banks and other service providers.
In 2012, the CJEU (Case C-259/11, DTZ Zadelhoff) ruled that the services of a service provider whose activity consisted in finding buyers for an office building, which sale was eventually effected through a transfer of shares in the legal entity holding this office building, were to be regarded as VAT exempt negotiation in shares. This judgment shows that there are situations where the assistance provided, for a fee, in share transfers should be regarded as VAT exempt negotiation in securities.
In April 2015, the European Commission analyzed whether investment advice could qualify as VAT exempt negotiation in securities. The European Commission is of the opinion that where an advisor provides investment advice without being further involved in the negotiations between the interested parties and the completion of a contract, the services of the advisor do not qualify as VAT exempt negotiation in shares. Opinions of the European Commission are not binding however.
Taxpayers that provide or engage investment advice should be aware of the potential impact of VAT exemptions. Providing exempt investment advisory services may negatively impact the right to recover VAT of service providers, whereas such an exemption could be beneficial to companies engaging these services where they don’t have a full right to recover input VAT. The structure of the servicing flows and the contracts should preferably be considered in advance. Please contact Gert-Jan van Norden or Irene Reiniers for more information.
4. Calculation partial recovery of input VAT
Banks applying the Dutch Banking Decree have to include the adjustment for the 2014 input VAT recovery ultimately in the September / Q3 2015 Dutch VAT return. The Dutch Banking Decree contains some specific rules on this, but the Banco Mais case might also affect this adjustment.
The (often) quiet summer period seems a good moment for banks applying the Dutch Banking Decree to calculate the annual 2014 pro rata recovery rate. In general, the adjustment for the 2014 input VAT recovery should have been included in the December / Q4 2014 VAT return. However, the Dutch Banking Decree allows banks to include this adjustment ultimately in the September / Q3 2015 Dutch VAT return. This gives banks extra time to calculate the pro rata recovery rate and the adjustment for input VAT recovery. Banks that apply the Banking Decree in 2014 / 2015 should take the following into account:
- all input VAT on mixed used goods and services (general costs) could be recovered on the basis of the pro rata recovery rate;
- the annual 2014 pro rata recovery rate is based on the ratio between turnover giving right to input tax recovery and the total turnover of the company in 2014;
- in this specific situation, only turnover that is typical of banking activities should be included in the pro rata calculation. The Banking Decree includes a list of activities that are not typical of banking;
- not only the 2014 input VAT recovery should be adjusted. The final 2014 pro rata recovery rate is also used as the provisional pro rata recovery rate for 2015. Consequently, the input VAT recovery in the period January – September 2015 should also be adjusted.
The Banking Decree includes specific rules to determine the turnover of financial activities (such as the provision of credit or currency arbitrage). In 2014, the CJEU rendered a judgment on the pro rata calculation (Case C-183/13, Banco Mais). Under specific circumstances, not the total turnover on certain activities is considered ‘turnover’ when calculating the pro rata recovery rate. This judgment may open new possibilities to improve a company’s right to recover input VAT.
In practice, we notice that the Dutch tax authorities are currently focusing on the pro rata calculation of banks and other financials. During the past few months, various financials have received queries from the Dutch tax authorities about this. We also notice that the Dutch tax authorities tend to use the CJEU Banco Mais judgment to reduce a company’s pro rata recovery rate. We would like to emphasize that this can only be the case if the pro rata calculation is more accurate than the general pro rata calculation (which is based on gross income).
Recovery of VAT on acquisition costs
The adjustment of the 2014 input VAT recovery could also be used to check whether all input VAT is indeed partially or fully recoverable. In a recent judgment by the CJEU (Case C-109/14, Larentia Minerva), the CJEU confirmed that VAT on acquisition costs can qualify as general costs of active holding companies. This judgment also applies to other companies that purchase or issue shares. If a bank or other financial acquires or issues shares, the acquisition costs will be regarded as general costs. Because most banks and other financials perform both VAT taxed and VAT exempt activities, a pro rata recovery rate applies. Consequently, the VAT on acquisition costs can be partially recovered.
5. CJEU decides that non-deductibility of currency loss on foreign shares does not breach EU law
On June 10, 2015 the CJEU decided that the Swedish rules that deny a deduction for a currency loss on shares in a foreign company were not contrary to EU law. The decision was primarily based on the fact that a similar loss could arise on shares in a Swedish company and this would also be non-deductible. We will briefly address the case as well as the impact of the decision for the Dutch tax practice.
The case concerned a Swedish company holding a dollar denominated shareholding of 45% in a UK company. The Swedish company intended to sell the shareholding, which would have resulted in a currency loss. Under Swedish tax law capital gains and losses (including those resulting from currency movements) on the alienation of such shares were not recognized for tax purposes. The Swedish company claimed this was contrary to EU law apparently on similar grounds to those accepted by the CJEU in the Deutsche Shell case (Case C-293/06), i.e. that the Swedish rules would result in an investment in another Member State being more uncertain – and therefore less favourable - than an investment in Swedish currency in a Swedish company.The Swedish Supreme Court subsequently referred the question to the CJEU.
Referring to its earlier case law, the CJEU noted that the facts of the case were covered by the freedom of establishment. It based its decision that the Swedish rules were not in breach of this freedom on the fact that capital losses (including currency losses) on shares such as those in question were not deductible irrespective of whether the companies in which the shares were held were or were not established in Sweden. Consequently there was no less favourable treatment of shares in foreign companies than in Swedish companies. In this respect the CJEU reached the same decision as the Advocate-General. The CJEU added that even if a Swedish company was likely to be discouraged from investing in a foreign company through the non-deductibility of its potential currency losses, this did not require Sweden to adapt its tax system to that of other countries where the investment could also turn out to be advantageous (i.e. if a currency gain arose).
The CJEU distinguished the case in question from the facts of the Deutsche Shell case, on the basis that in the latter case currency gains and losses were in general recognized for tax purposes, unless a tax treaty provided otherwise, whereas under the Swedish rules such gains and losses were in general not recognized for tax purposes. Allowing a deduction for currency losses under the Swedish rules would result in an asymmetrical treatment of currency gains and losses.
Having decided that the Swedish rules did not constitute a restriction on the freedom of establishment the CJEU, unlike the Advocate-General, did not comment on the possible justifications.
Impact for the Netherlands
This is a remarkable decision in view of the similarity of its facts with the Deutsche Shell case on the one hand, and the different outcomes of the two cases on the other. However, the key to the difference seems to lie in whether or not the same tax treatment applies in the case of foreign and domestic investments.
In the Netherlands the deduction of currency losses is also an issue. On the basis of Dutch law it is not possible to deduct currency losses on shares qualifying for the participation exemption for corporate income tax purposes. Therefore, the question whether or not this was in accordance with EU law was also raised in the Netherlands. The Court of Appeal in The Hague rendered an interesting decision on this in favor of the taxpayer on January 13, 2015 (case No. BK-14/00254 and BK-14/00255). The Under Minister of the Ministry of Finance filed an appeal against this decision with the Supreme Court which is still pending.
As the Dutch rules for the participation exemption – like the Swedish rules – do not result in a tax treatment which is disadvantageous with respect to participations in foreign companies, the CJEU’s decision seems to have a negative impact on pending claims. If you would like to receive more information about this case, please contact Otto Marres.
6. OECD releases Country-by-Country (CbC) Reporting Implementation Package (BEPS Action 13)
On June 8, 2015 the Organisation for Economic Co-operation and Development (OECD) released a package of measures for the implementation of a new CbC Reporting plan developed under Action 13 of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project.
Following the September 2014 report and Guidance on the Implementation of Transfer Pricing Documentation and CbC Reporting Proposals in February 2015, the CbC Implementation Package can assist jurisdictions with the effective local implementation of CbC Reporting and consists of model legislation and three model Competent Authority Agreements.
BEPS 13 Project: CbC Reporting
A key objective of the BEPS 13 project is to increase transparency through improved transfer pricing documentation standards, including through the use of CbC Reporting. CbC Reporting obliges (Financial services) Multinational enterprises (“MNEs”) to provide tax administrations information annually, in each jurisdiction where they do business, relating to the global allocation of income and taxes paid, together with other indicators of the location of economic activity within the MNE group.
The new Implementation Package
Jurisdictions are encouraged to expand the coverage of their international agreements for the exchange of information, which will be an essential and integral part of the implementation and ongoing monitoring process regarding CbC Reporting. The new Implementation Package contains model – local – legislation regarding the filing of CbC Reports and three Model Competent Authority Agreements to facilitate the exchange of CbC Reports among tax administrations.
Model - local -legislation
- The model – local – legislation is to be used by countries to require the ultimate parent entity of an MNE group to file the CbC Report in its jurisdiction of residence.
- The model legislation provides for backup filing requirements: a) when the jurisdiction of the ultimate parent entity does not require filing, b) when the jurisdiction of the ultimate parent does not have a Qualifying Competent Authority Agreement, or c) in case there has been a “Systematic Failure” in the jurisdiction of the ultimate parent entity. In those cases a “Surrogate Parent Entity” can substitute the ultimate parent company and file the CbC Report on behalf of the MNE Group.
- If no (Surrogate) Parent Entity is appointed, local members of MNEs are obliged to file CbC at a local level.
Model Competent Authority Agreements
The three Model Competent Authority Agreements facilitate the exchange of CbC Reports among tax administrations. The model agreements are based on:
- the Multilateral Convention on Administrative Assistance in Tax Matters;
- bilateral (double) tax conventions; and
- Tax Information Exchange Agreements (TIEAs).
The purpose is to set forth rules and procedures to automatically exchange CbC Reports prepared by the Reporting Entity of an MNE Group, and filed in the jurisdiction of the (Surrogate) Parent Entity, with the tax authorities of all jurisdictions in which the MNE group operates. The above items 1) - 3) aim to achieve a global coverage which will not only be limited to OECD member countries.
Countries participating in the OECD/G20 BEPS Project approved the package at the last meeting of the OECD Committee on Fiscal Affairs, held on May 27-28, 2015.
The OECD currently has no intention of issuing a further report on BEPS 13 and is leaving the implementation, including the application of any penalties, at the discretion of the local jurisdictions. The OECD does intend to develop an XML Schema and a related User Guide. This is to accommodate jurisdictions to eventually electronically exchange CbC Reports within three months (six months in the first year) after receipt of the CbC information from the MNE.
As outlined in the September 2014 report on BEPS 13, the CbC Report is part of a three-tiered structure, along with a global master file and a local file, which together represent a standardized approach to transfer pricing documentation. The CbC Report is intended to provide tax administrations with relevant and reliable information to perform an efficient and robust transfer pricing risk assessment. The CbC Reporting is subject to a EUR 750 million threshold, which a MNE needs to exceed in terms of consolidated turnover. The implementation of (and thresholds, if any, for) the master and local transfer pricing files are left at the discretion of the individual jurisdictions.
The Dutch Ministry of Finance already publicly announced that it supports the OECD transparency initiatives, but also the EU initiatives on transparency. Whereas BEPS 13 only prescribes exchange of information between tax administrations, the EU initiatives are aimed at sharing information with the general public. As such, the call for increasing tax transparency is being echoed around the globe. Therefore, MNEs need to consider their transfer pricing policies and documentation in order to ascertain whether they are ready to respond to the new world of transparency.
In order to respond to possible risks and opportunities arising from the transparency entailed by BEPS 13, Meijburg & Co has developed the Diagnostic Review to assist MNEs in assessing their BEPS readiness. If you would like to receive more information about this case, please contact Jaap Reyneveld.