FS Tax Newsletter | January 2020
Last year our first FS Tax Newsletter for 2019 discussed the CJEU judgment rendered in the Morgan Stanley case, concerning the right of a branch to recover input VAT if it (partially) provides support services to the head office in another EU Member State. We will be discussing in this newsletter a similar matter that has been presented to the CJEU for a preliminary ruling in the Bank of China case. We also discuss another case concerning the VAT position of fixed establishments. It seems that branches and VAT are still a hot topic in 2020.
Besides the abovementioned VAT issues, this newsletter also addresses a CJEU decision with a positive outcome for pension funds (irrespective of whether they are based in the EU) and a new Decree published by the Deputy Minister of Finance that is relevant for fiscal investment institution (FFI) structures. Lastly, we discuss the revised Financial Transaction Tax proposal presented by the German Finance Minister.
If you would like to know more about the matters addressed in this newsletter please contact us.
For tax-related topics not included in this FS Tax Newsletter, please visit our website.
Niels Groothuizen, Partner, Financial Services Tax Group
Table of Contents
- 1. New questions regarding the right to recover input VAT for a fixed establishment in the EU with a head office outside the EU; the Bank of China Limited case (case no. C-737/19)
- 2. Advocate General Opinion: Should a European subsidiary of a parent company established outside the European Union qualify as a fixed establishment for VAT purposes?
- 3. CJEU decision in College Pension Plan of British Columbia case
- 4. Deputy Minister of Finance publishes new decree on the remuneration of real estate development subsidiaries in fiscal investment institution (FII) structures; other relevant issues for FIIs
- 5. German Finance Minister presents revised Financial Transaction Tax proposal
1. New questions regarding the right to recover input VAT for a fixed establishment in the EU with a head office outside the EU; the Bank of China Limited case (case no. C-737/19)
On January 24, 2019, the CJEU rendered judgment in the Morgan Stanley & Co International plc (‘Morgan Stanley’) case (case no. C-165/17). This case concerned the recovery of VAT charged on the costs incurred by a fixed establishment that are also used for the turnover of a foreign head office (in the European Union). The CJEU ruled that the turnover of the EU head office needs to be taken into account when determining the input VAT recovery entitlement. We refer to our tax alert for more information.
New questions have now been raised by the same Member State (France), whereby reference is made to the Morgan Stanley case. France has asked the CJEU for a preliminary ruling on whether the Morgan Stanley judgment also applies if the head office of a fixed establishment is established outside the European Union (and therefore outside the scope of the EU VAT Directive). If this question is answered in the affirmative, under what conditions may banking transactions carried out by the head office established in a third country be regarded as giving rise to a right to recover input VAT in the fixed establishment’s EU Member State of establishment? We will update you on the progress in this case.
Should you have any questions about this matter, please contact Gert-Jan van Norden, Irene Reiniers or Jochum Zutt.
2. Advocate General Opinion: Should a European subsidiary of a parent company established outside the European Union qualify as a fixed establishment for VAT purposes?
On November 14, 2019, Advocate General Kokott rendered her Opinion in the Dong Yang Electronics case (C-547/18). The case concerned the question whether a subsidiary that is established in the European Union should be regarded for VAT purposes as a fixed establishment of a parent company established outside the European Union.
According to the Advocate General, it should not, unless there is an abusive contractual structure. In the Netherlands, a subsidiary is, in principle, not regarded as a fixed establishment. If the CJEU does not follow the Opinion of the Advocate General, then this case could have a major impact on current Dutch practice. We refer to our tax alert for more information.
Should you have any questions about this matter, please contact Gert-Jan van Norden, Irene Reiniers or Jochum Zutt.
3. CJEU decision in College Pension Plan of British Columbia case
On November 13, 2019, the Court of Justice of the European Union (CJEU) rendered its decision in the College Pension Plan of British Columbia case (C-641/17) concerning the compatibility with EU law of the German withholding tax on dividends paid to a Canadian pension scheme. The Court ruled that the German legislation constitutes an unjustified restriction to the free movement of capital and noted that the derogation from the prohibition on restrictions to the free movement of capital with non-EU countries (also referred to as the 'Standstill Clause') does not apply to the case at hand.
The College Pension Plan of British Columbia is a tax-exempt Canadian-resident pension fund in the legal form of a common law trust. During the years 2007 through 2010, the pension fund received dividends from German stock corporations, which were subject to a 15% withholding tax in Germany pursuant to the Canada-Germany double taxation treaty.
The fund applied for a refund of the withholding tax, arguing that it received discriminatory treatment. Under German law, a German pension fund would be allowed to deduct technical reserves taking account of its future pension liabilities. This means that only the net income is subject to corporate income tax, which results in a tax burden much lower than 15%.
Although the Court did not specifically address the relevance of the “net taxation argument” in this case (i.e. the fact that non-residents cannot deduct expenses directly related to the collection of dividends), this decision represents a very positive outcome for pension funds (irrespective of whether they are based in the EU) that filed withholding tax reclaims in the EU on the grounds that resident pensions funds may benefit from a more advantageous tax treatment in the form of a withholding tax refund due to the tax deductibility of their technical reserves.
See our tax alert and/or contact Robert van der Jagt or one of our other FS Tax Professionals for more information about this matter.
4. Deputy Minister of Finance publishes new decree on the remuneration of real estate development subsidiaries in fiscal investment institution (FII) structures; other relevant issues for FIIs
On November 29, 2019, the Deputy Minister published a Decree on the remuneration that should be attributed to activities performed by real estate development subsidiaries in FII structures.
In this Decree, the Deputy Minister explains his view that the intention of the legislator is to tax the full project development profit in the development entity, and that a cost-related remuneration for the development entity would (potentially) result in the total development profit not being fully taxed. In his opinion, there are substantial development risks and activities connected with an entrepreneurial function, with project-specific unique risks, that cannot be benchmarked against third parties. Therefore, according to the Deputy Minister, a remuneration based on a cost-plus method or transactional net margin method is not appropriate for determining the business remuneration for such activities.
In his view, to obtain a good indication of an arm’s length business remuneration for the development entity, the basis of the calculation should be the full value change of the developed property from the start of the planning phase / initiation phase to the completion of the project, taking into account the autonomous change in the value of the developed real estate (i.e. the change in value not caused by the development of the real estate).
In addition to the above, the Decree contains a policy statement regarding mergers or demergers of sub-funds and/or the merging or sub-division of share classes within an FII. In principle, tax claims of the FII and its participants may be rolled-over, provided that such a reorganization is based on sound business practice and the tax roll-over does not result in a (potential) loss of the dividend withholding tax claim or corporate income tax claim in the Netherlands. The Deputy Minister confirmed that this tax roll-over should be possible under certain circumstances, to be assessed on a case-by-case basis.
Lastly, the Deputy Minister confirmed in the Decree that the Dutch fiscal unity emergency remedial measures should not be considered in determining the annual profit distribution obligation of an FII.
Should you have any questions about this matter, please contact Annemiek van Dijk or one of our other FS Tax Professionals for more information.
5. German Finance Minister presents revised Financial Transaction Tax proposal
On December 9, 2019, the German Finance Minister presented a revised proposal for a Council Directive regarding the introduction of a common financial transaction tax (FTT) to the participating Member States in the enhanced cooperation procedure (Germany, Austria, Belgium, France, Greece, Italy, Portugal, Slovakia, Slovenia and Spain). The revised proposal includes an optional exemption for pension schemes and a new system for the mutualization of the FTT revenues.
The revised proposal refers to an FTT that would be levied at a minimum standard rate of 0.2% and apply to financial transactions that mainly involve the acquisition of shares issued by listed companies located in a participating Member State with a market capitalization above EUR 1 billion. In line with the proposal that was under discussion within the enhanced cooperation group, certain types of financial transactions would not be subject to the FTT, such as initial public offerings, market-making activities, intra-group transactions, repurchase agreements and reverse repurchase agreements, securities lending and borrowing, buy-sell back and sell-buy back agreements.
The revised proposal now also includes an optional tax exemption for pension schemes, which was requested by Italy, Belgium and Slovakia in the course of a working group meeting on November 12, 2019.
The draft law also provides for a mutualization mechanism, which (according to a document accompanying the proposal) represents a compromise reached by Germany, France and Italy. Under the proposed mechanism, FTT revenue will be allocated between the participating Member States to ensure that all participating jurisdictions reach a guaranteed minimum annual revenue of EUR 20 million. This mechanism is thought to encourage smaller economies, for which the FTT would only generate limited revenues, to participate in the initiative.
In his letter accompanying the FTT proposal the German Finance Minister asks the participating Member States to back the draft directive. He had previously stated that the tax should be implemented by 2021. However, the draft directive leaves the date of entry into force open.
Should you have any questions about this matter, please contact Robert van der Jagt or one of our other FS Tax Professionals for more information.
