The Supreme Court has ruled that a VAT taxable business can deduct the VAT charged on the costs incurred for the management and the business activities of its own company pension fund. Furthermore, the Advocate General has taken the view that the management of pension funds with a defined benefit plan can be exempt from VAT. It is now up to the politicians and the Supreme Court to render a final decision on this.
Supreme Court judgment on the deduction of VAT on costs incurred by pension funds
On April 1, 2014 the Court of Appeals Arnhem-Leeuwarden ruled that a business can deduct the VAT charged on the costs incurred for the management and the business activities of its own company pension fund. The costs included administrative and asset management expenses. After the judgment rendered by Court of Justice of the European Union on July 18, 2013 in the PPG Holdings case (case no. C-26/12), the Court of Appeals had to rule on whether the costs incurred for the own company pension fund could be regarded as general costs. The Deputy Minister of Finance filed an appeal with the Supreme Court against this Court of Appeals judgment.
The conclusion of the Supreme Court
The Supreme Court has now confirmed that the costs incurred for the management and business activities of the own company pension fund constitute general costs for a company. This conclusion is based on the fact that the only reason these costs are incurred is because of the taxable activities of the business. After all, a business is expected to bear such costs, which are directly related to commitments arising from employment (pensions).
The assertion by the Deputy Minister of Finance that VAT deduction adjustments arising from the VAT Deduction Exclusion Decree 1968 apply to the abovementioned costs, was rejected by the Supreme Court. The Deputy Minister’s argument that the business performs taxed services for the company pension fund was not dealt with in the interest of due process.
The VAT issues in these proceedings are part of the larger issue of how pension funds can avoid the impact of VAT. As a rule, pension funds only have very limited possibilities for deducting the VAT charged on costs. If, in a specific situation, it is possible to purchase services at the level of the business instead of at the level of the pension fund, this VAT burden may be avoided. The legislation and regulations governing the supervision of pension funds must of course be taken into consideration. This will only have effect if and insofar as the activities of the business itself provide an entitlement to a VAT deduction. From a VAT perspective, this judgment by the Supreme Court has opened the door even further to this possibility. However, we expect that in practice the Dutch tax authorities will continue to impede the VAT deduction at the level of the business, for example by taking the position that the business performs taxed services for its own company pension fund. As mentioned above, the Supreme Court did not deal with the latter point.
Opinion of Advocate General on exemption for the management of pension funds
The Advocate General to the Supreme Court addressed the question whether a pension fund with a defined benefit (DB) plan can be regarded as a special investment fund, which will exempt the management of it. Unlike the Court of Appeals in the Hague, the Advocate General concluded that the management of a pension fund with a DB plan can be exempted from VAT.
If the Supreme Court follows the Advocate General’s Opinion, this will mean that the management services provided to Dutch pension funds will generally be exempt from VAT. Not only purely asset management services qualify as ‘management’; certain pension administration activities and investment advisory services also qualify as such.
Investigation into unequal treatment of DB and DC plans
During the parliamentary debates in the Upper House on the General Pension Fund, a motion put forward by Ms. Oomen-Ruijten was carried. The motion requested the government to investigate whether it was possible to apply the same VAT treatment to the management of pension funds with a defined contribution (DC) plan and a DB plan. With regard to this motion, Deputy Minister Wiebes indicated that he wished to await the Opinion of the Advocate General. We infer from this that the Opinion could well be regarded as the aforementioned investigation. In our view, politicians cannot delay taking action until the Supreme Court renders its judgment, but must already do so in response to the Opinion issued by the Advocate General.
Many pension funds and service providers have already filed notices of objection against the payment of VAT on management services. If, when all is said and done, the VAT exemption can also be applied to the management of pension funds with a DB plan, then one of the following actions can be taken:
- Pension funds with foreign managers can reclaim the reported (reverse charged) VAT from the Dutch tax authorities;
- Pension funds with Dutch managers can consult with these service providers in order to reclaim the VAT;
- Dutch service providers can reclaim the reported VAT from the Dutch tax authorities.
The advisors of the Indirect Tax Financial Services Group would be pleased to help you identify what the potential impact of the Supreme Court judgment and/or the Opinion of the Advocate General will be. Please feel free to contact them or your designated advisor.