On July 27, 2015 the Court of Appeals Arnhem-Leeuwarden (the “Court”) rendered judgment on the deduction of VAT charged on costs that a company pension fund recharged to the group entities for which it operates the pension plan. In its judgment, the Court confirms that the recharging of costs must be regarded as 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 deducted. As such, the judgment of the Court appears to have broadened the entitlement to recover input tax for pension funds.
1. The case
The taxpayer is a company pension fund that administers the pension plans of various companies (who provide VAT-taxable 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 company 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 company pension fund. In accordance with this agreement, the company pension fund issued an invoice (including VAT) to the employer for the purposes of recharging the majority of the costs incurred. The VAT on the incoming costs was deducted.
The question the Court was asked to rule on was whether the company pension fund could deduct the input VAT charged on the incurred costs with regard to the transition.
2. The court's judgement
Contrary to the District Court, the Court ruled that the recharging of costs must be regarded as payment for a VAT-taxed service. The tax inspector failed to disprove this. Furthermore, the Court ruled that the incoming costs were directly allocable to the VAT-taxable service (“direct costs”), insofar as they were recharged to the employer. With regard to this part of the costs, the company pension fund is fully entitled to recover the input VAT. The remaining costs (that were not recharged) qualified as general overhead of the pension fund, for which the input VAT, in this case, could not be recovered at all.
The Dutch tax authorities have now appealed this judgment to the Supreme Court.
Many pension funds are currently in discussion with the Dutch tax authorities about their VAT position, including how costs recharged to the employer should qualify for VAT purposes. This is the first time that a Court has confirmed that the costs a pension fund recharges to the employer could be regarded as payment for a VAT-taxable service. Although in the case in question the company pension fund recharged costs as part of a group transfer of accrued pension benefits, we believe that the judgment will have a much broader impact. 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.This is also informally referred to as ‘the reverse PPG approach’ (after the judgment by the Court of Justice of the European Union dated July 18, 2013 in case no. C-26/12 (PPG Holdings BV)). This judgment 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.If the Supreme Court follows the Court, the recharging of costs will provide a way to reduce the VAT burden on pension funds. Assuming that the employer is fully entitled to deduct input VAT, the VAT will not be a cost item for either party.
What strikes us most about this judgment is the fact that the Court 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. The costs on a single incoming invoice are thereby split into direct costs and indirect costs (e.g. general overhead). In our view, this is inconsistent with a strict reading of the legislation, in which it is stated that direct costs are ‘solely’ allocable to a VAT-taxable (or exempt) service. We therefore see opportunities for deducting the VAT on the part of the costs that are not recharged to the employer as well.
The judgment may also have an impact on the discussion about the recharging of costs by holding companies. At issue is mostly 1) whether the recharged costs qualify as a payment for a VAT-taxable service, and 2) what the extent is to which the entitlement to recover input VAT arises in situations where engaged services are resold below cost price. Keeping the judgment in mind, it is clear that, in any case, there is VAT-taxable recharging with an entitlement to deduct the VAT on incoming costs, insofar as the costs are recharged.
4. Your options
According to the Court, a company pension fund could deduct the VAT on incoming costs if they are recharged to the employer. We realize that the employer will wish to be compensated for the recharged costs. We see a compensation opportunity in a reduction of the pension contribution, but understand that this may be difficult to achieve in practice. In particular in the case of industry-wide pension funds, we expect that this will require discussion at various levels, given that the costs will be recharged to different employers. In light of the possible financial impact of this case, we recommend – in anticipation of the Supreme Court judgment – examining the possibility to recharge costs in more detail.
If you do not administer a pension plan, but your business is also not entitled/only has 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. It is important in this respect 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. Please feel free to contact Gert-Jan van Norden, Irene Reiniers or your regular contact at Meijburg & Co if you wish to discuss the recharging of costs in more detail.