On June 17, 2016 Advocate General Wattel issued his Opinion on the deduction of VAT charged on the costs that a company pension fund recharged to the group entities for which it operates the pension plan (case no. 15/04099). Previously, the Court of Appeals confirmed that the recharging of costs must be regarded as a payment for a VAT-taxable service which a company pension fund provides to the employer. In addition, the VAT on costs directly allocable to the VAT-taxable service could be deductible. The Advocate General however concluded that further examination of the facts must show whether and, if so, which VAT-taxable service is provided in exchange for the recharged costs. Only then can it be assessed whether the company pension fund is entitled to deduct the VAT on the costs recharged to the employer.
The taxpayer is a company pension fund that administers the pension plans of various companies (who provide VAT-taxed services) of the same group (the “employer”). At a certain point in time it was decided to dissolve the company pension fund and transfer the pension entitlements to an industry-wide pension fund. The written agreements between the pension fund and the employer concerning the transition to an industry-wide pension fund included the agreement that the employer would contribute to the transition costs incurred by the pension fund. In accordance with this agreement, the pension fund issued an invoice (including VAT) to the employer for the purposes of recharging the majority of the costs incurred. The pension fund deducted the VAT on the incoming costs.
The question the Supreme Court was asked to rule on was whether the company pension fund was correct in deducting the input VAT charged on the incurred costs with regard to the transition.
The Advocate General’s Opinion
The Court of Appeals had previously ruled that the recharging of costs must be regarded as payment for a VAT-taxable service and that the tax inspector had failed to convincingly demonstrate that the contrary was the case. This means that the incoming costs, insofar as these were recharged to the employer, were directly allocable to the VAT-taxable service. With regard to this part of the costs, the company pension fund is fully entitled to recover the input VAT. We refer to our earlier alert on this.
Unlike the Court of Appeals, the Advocate General believes that the tax inspector was not given sufficient opportunity to refute the presumption that the payment to the company pension fund is reciprocated by an identifiable service. According to the Advocate General, the Court of Appeals should have identified the VAT-taxable service it refers to that was directly related to the recharged costs. The Advocate General has therefore advised the Supreme Court to refer the case for an examination of the facts. We will now have to await which direction the Supreme Court will choose.
The VAT treatment of recharging costs is a topic which is increasingly being dealt with in case law. In a recent judgment dated June 7, 2016 (case no. 15/2745), the District Court of Gelderland ruled, for example, that the recharging of auditor fees by a holding company was not a VAT-taxable service. According to the District Court, the holding company could not convincingly demonstrate the legal relationship with its subsidiaries to assume that the recharged costs formed the payment for the holding services performed for the subsidiaries. The Opinion of the Advocate General in this case also emphasizes the importance of demonstrating that there is a VAT-taxable service.
In practice, the possibility of pension funds being able to deduct the VAT on incoming costs by way of recharging costs to the employer is an issue that often comes up for discussion. The judgment rendered by the Court of Appeals confirmed that a VAT-taxable service can be the underlying factor in the recharging of costs to the employer and offers an additional argument to substantiate the deduction of VAT on incoming costs. However, if the Supreme Court follows the Opinion of the Advocate General, the case will be referred to a Court of Appeals for a further examination of the facts.
In our alert on the Court of Appeals judgment, we noted that the Court of Appeals makes a distinction between the costs by only allowing the deduction of VAT on the incoming costs, insofar as they are recharged to the employer. In our view, this is inconsistent with a strict interpretation of the legislation. We therefore also see possibilities for deducting the VAT on the part of the costs that are not recharged to the employer. For the sake of completeness, we note that in the proceedings before the Supreme Court the taxpayer also appealed the conclusion in the Court of Appeals judgment, which held that the VAT on the costs that are not recharged is non-deductible.
In light of the possible financial impact of this case, we recommend – in anticipation of the Supreme Court judgment – examining the possibility recharge costs in more detail.
If you are not a pension fund but another type of business without, or with a limited entitlement to recover VAT, it would also be advisable to review your VAT position.
We recommend assessing (1) whether there is a direct relationship between yourself and the party to whom you recharge the costs; and (2) whether the recharged costs constitute the consideration for the service provided. In this respect, it is also important that the relationship between the recharging of the costs and the incoming costs can be demonstrated.
The tax advisors of the Indirect Tax Financial Services Group of Meijburg & Co would be pleased to help you identify any VAT consequences, prepare notices of objection and tighten VAT provisions. Feel free to contact one of these tax advisors or your regular contact for more information.