On November 25, 2016 the Supreme Court rendered judgment in the Fiscale Eenheid X case. It appears that the Supreme Court has further limited the exemption for the management of real estate companies. The Supreme Court ruled that the VAT exemption can only apply if (the manager of) an investment institution was actually granted a license as referred to in the (then applicable) Investment Institutions Supervision Act (Wet toezicht beleggingsinstellingen; “WTB”) This judgment follows on from the judgment rendered by the Court of Justice of the European Union (“CJEU”) and the Opinion issued by Advocate General Ettema in this case.
1. The case
The taxpayer concluded management agreements with three companies that invest in real estate (“real estate funds”). The activities performed by the taxpayer include the administration and management of the real estate funds, attracting investors, the purchase and sale of real estate and property management.
The management of special investment funds is VAT-exempt. As a further explanation of the exemption, the CJEU ruled, in short, that funds are only to be regarded as special investment funds if they are subject to ‘specific State supervision’ at the national level. Moreover, the actual property management does not qualify as ‘management’ within the meaning of the VAT exemption.
2. Analysis of Supreme Court judgment
Special investment funds and specific State supervision
According to the CJEU, funds are only to be regarded as special investment funds if national law provides for ‘specific State supervision’.
The Supreme Court ruled that the supervision applying in 1996 by virtue of the WTB can be regarded as specific State supervision. However, if an investment institution falls under the WTB but is exempt from the requirement to hold a license and is not entered in the WTB register, then there is no specific State supervision. According to the Supreme Court, this means that the exemption for the management of special investment funds does not apply to the management of investment institutions exempted from the requirement to hold a license. The Court of Appeals Arnhem-Leeuwarden will have to investigate whether the companies held a WTB license in 1996.
By virtue of the WTB, institutions could request to be discharged from the requirement to hold a license. However, it appears that these institutions could nevertheless be entered into the WTB register, despite the fact that they did not meet the requirements for obtaining a license. Do they then qualify as special investment funds? The mere fact that a fund may fall under the WTB is not considered sufficient by the Supreme Court.
As of January 1, 2017 the supervisory legal framework has been laid down in the Financial Supervision Act (Wet op het financieel toezicht). It is unclear whether the Supreme Court judgment applies in the same way to the requirement to hold a license in this Act and any other laws that qualify as specific State supervision.
The Supreme Court judgment is also important for the question whether pension funds are subject to specific State supervision. In this respect, we would like to point out that in her Opinion to the CJEU in the Fiscale Eenheid X case, the Advocate General stated that industry-wide pension funds, in principle, fall under specific State supervision. Advocate General Ettema also drew this conclusion. Although both the CJEU and the Supreme Court did not take a position on this, these are important arguments for asserting that pension funds do indeed meet this requirement.
According to the CJEU, actual property management (including the lease, the management of existing leases, as well as authorizing third parties and the control of maintenance activities) does not qualify as ‘management’ within the meaning of the VAT exemption, which makes these services not exempt. Insofar as the services consist of “administrative services of a general nature” and “the operational management of real estate companies”, this is management. With regard to these service elements, it is therefore important whether there is a special investment fund. If the Court of Appeals Arnhem-Leeuwarden establishes that these are special investment funds, it should also examine how the all-in fee agreed for the activities must be split and allocated to the VAT-exempt management and to the VAT-taxed actual property management.
3. Potential implications
The Supreme Court judgment appears to further curtail the VAT exemption in the Netherlands. It will be necessary to ascertain for all fund managers whether they are actually required to hold a license. If this is not the case, then the VAT charged on the management of funds that perform activities which are partly or fully VAT-exempt, will be an expense item.
We expect the Dutch tax authorities to eventually announce new policy on this exemption and that this policy will only apply to the future.
The tax advisors of the Indirect Tax Financial Services Group and the Indirect Tax Real Estate Group of Meijburg & Co would be pleased to help you identify the possible impact of this judgment on your business. Feel free to contact one of them or your regular contact for more information.