Dear FS Professional,
First of all, we hope that you, your colleagues, families and friends are keeping safe and well. The Corona crisis has taken the world by storm and the business community is also affected. We have seen several measures taken by different countries and regions worldwide. Although most countries are preparing for their lockdown exit strategy at the moment, we do not expect that the world will soon return to how it was pre-COVID. We can imagine that your company has also taken measures in this respect. Please click here for our information page regarding the coronavirus or click here for the regularly updated information (by KPMG member firms) regarding measures taken by local governments worldwide.
In this edition of the FS Tax Newsletter we address two developments initiated by the Dutch tax authorities: the further development of horizontal monitoring and the cancellation of rulings confirming the VAT exemption for investment management services provided to CLOs. We also discuss four other VAT-related subjects: an interesting judgment from the Court of Appeals Den Bosch regarding the VAT recovery methodology of a financial institution, the opinion of the Advocate General of the Court of Justice of the European Union on the VAT treatment of purchased investment management services that are used for both Special Investment Funds as well as non-Special Investment Funds, a judgment by the Noord-Holland District Court on the VAT position of a company pension fund, and recent developments with respect to the term ‘fixed establishment’ for VAT purposes. In addition, we will address an important judgment concerning the possibility of reclaiming dividend withholding tax in the Netherlands.
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
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Table of Contents
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1. Interesting judgment from the Court of Appeals Den Bosch about the VAT recovery of a bank
Financial institutions can benefit from a judgment rendered by the Court of Appeals Den Bosch on March 27, 2020, which makes it possible for financial institutions to determine the recovery of input VAT on the basis of cost accounting principles and thus save significantly on the cost of VAT.
The Court ruled that the ‘actual use method’ that the bank had proposed had been sufficiently substantiated. Therefore, the recovery of VAT on mixed costs does not have to be determined on the basis of the standard turnover-based pro rata method, but may be based on actual use.
This will be a welcome judgment for many market parties. EU case law has long offered more scope for applying an actual use method instead of a standard turnover-pro rata method. Due to the strict interpretation of actual use applied in Dutch case law, as well as the Dutch tax authorities’ interpretation based on this case law, this scope could not actually be used. The basic principle for recovering VAT should, however, be that it is as realistic as possible, is as much as possible in line with use and thus does justice to tax neutrality.
The Court of Appeals Den Bosch deemed the applied method to be based on sufficiently objective and precisely determined data, which – in comparison to the standard turnover-based pro rata method – results in a more accurate determination of the actual use and thus of the VAT recovery. The Court explicitly noted that within an actual use approach there is room to apply assumptions, since mixed-use costs inherently mean that these cannot be directly related to taxed or exempt turnover. Methods based on cost accounting, which are comparable to the method applied by the taxpayer, should also be acceptable. The Court rightly ruled that the Morgan Stanley judgment also supports a more specific approach to costs with regard to VAT recovery.
The Netherlands has not taken advantage of the possibility offered in the EU VAT Directive to specifically allow a VAT recovery method based on sectors. A number of other Member States do allow this option and many foreign taxpayers use it in practice. It appears that, by adopting actual use, the judgment by the Court leaves room to allow a method based on sectors, provided it is based on objective and precisely determined data and leads to a more accurate result.
To read our full tax alert, please click here or contact Gert-Jan van Norden, Irene Reiniers or Jochum Zutt.
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2. Important judgments concerning the possibility of reclaiming dividend withholding tax in the Netherlands
There have been two important judgments with respect to foreign investment funds trying to reclaim dividend withholding tax in the Netherlands.
The first case concerns a judgment of the Dutch Supreme Court of January 24, 2020 regarding a German Spezial Sondervermögen with one participant/investor. The Court held that that (permanent) single participant Spezial Sondervermögen are considered to be tax transparent for Dutch tax purposes. This implies that from a Dutch tax point of view, the German fund is not considered to be the beneficiary of the dividends but rather the participant, who should therefore file the refund request. Now that the Supreme Court ruled that a single participant Spezial Sondervermögen should be regarded as tax transparent for Dutch tax purposes, the refund would highly likely be granted should the participant have been exempt from Dutch corporate income tax.
Furthermore, on January 30, 2020, the Court of Justice of the European Union rendered its landmark decision in the Köln-Aktienfonds Deka case (C-156/17) concerning the compatibility with EU law of the Dutch withholding tax on dividends distributed to non-resident investment funds. This case, argued by KPMG Meijburg, concerns a German Publikum Sondervermögen that filed for a dividend withholding tax refund claim in the Netherlands. Although, this judgment is not “game-set-and-match” yet for the fund, it is fair to say that the fund is well positioned to win the case. This depends on the outcome of certain questions, which must be examined by the referring court in the Netherlands. For more information on this case, please click here.
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3. Advocate General at the CJEU in the BlackRock VAT case: a single fund management service is, in principle, not partly VAT-exempt
On March 11, 2020 Advocate General (‘AG’) Pikamäe at the CJEU rendered his Opinion in the BlackRock Investment Management (UK) Limited case (‘BlackRock’, case no. C-231/19).
At issue in the case is whether a single service purchased by BlackRock can be split in such a way that part of the payment for that service is VAT-exempt under the exemption for the management of special investment funds, while the other part is treated as VAT‑taxed. BlackRock argued that such a split must be made on the basis of whether the purchased service is used for the management of a special investment fund (VAT-exempt) or for other funds that are not special investment funds (VAT-taxed).
The AG concluded that, in principle, a single service can only be subject to one VAT treatment and that the exemption for the management of special investment funds does not apply to the service purchased by BlackRock. This could be different if sufficient information is available to precisely and objectively determine which part of the payment relates to the VAT-exempt services.
To read our full tax alert, please click here or for more information on this subject, please contact Gert-Jan van Norden or Irene Reiniers.
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4. District Court judgment on the VAT position of a company pension fund
The main dispute in this case was whether the company pension fund could qualify as a special investment fund for Dutch VAT purposes and therefore the management services received could be exempt from VAT. The judgment by the Noord-Holland District Court was published on January 15, 2020. The Court ruled that the company pension fund in question did not qualify as a special investment fund. According to the Court, in order to qualify as a special investment fund the pension fund should qualify as a UCITS, have the characteristics of a UCITS or should be sufficiently comparable to a UCITS in order for it to be in competition with UCITS funds. The Court noted that the investment risk carried by the participants was not equivalent to the investment risk carried by UCITS participants and therefore the pension fund did not qualify as such, nor was it in sufficient competition with a UCITS fund.
In order to qualify as a special investment fund, pension funds have to fulfill all four of the following conditions:
- The pension fund must be financed by the persons entitled to the pension.
- The money must be invested according to risk-spreading principles.
- The investment risk must be borne by the persons entitled to the pension.
- The pension fund must be subject to specific state supervision.
Dutch pension funds falling under the Dutch Pension Act in principle fulfill conditions 1, 2 and 4. The third condition was therefore in dispute in the abovementioned case.
According to the District Court, the participants did not bear a sufficient investment risk. As such, the pension fund could not qualify as a special investment fund for VAT purposes. As far as the Court was concerned, the fact that the non-indexation and moderation of the pension entitlements of members not yet retired actually took place, makes no difference for this qualification. The Court noted that these were real risks, but this did not change the indirect nature of the risks. The amount of the entitlements and the subsequent benefits are primarily based on the number of years of employment and salary, and not on the results of the investments. The fact that the employer has no additional payment obligation only means that the risk is effected sooner, but does not change the nature of the risk.
It is questionable whether the Court correctly interpreted that even though the amount of the entitlement is based on the number of years of employment and salary, a substantial part of the pension entitlement will have to be paid out of the results of the investments. This is similar to a pure defined contribution scheme, which qualifies as a special investment fund for Dutch VAT purposes, where the final pension benefit is largely paid out of the investment results. We expect this point to be raised in the future in other court cases.
With regard to the three remaining disputed issues, the Court also ruled against the pension fund. These three points were i) the applicability of the insurance exemption, ii) the application of the exemption for securities brokerage on the fiduciary management fees and iii) the applicability of the ‘40/60 arrangement’ as agreed between the Dutch Banking Association and the Dutch tax authorities. The position in respect to the first point has recently also been confirmed in the CJEU United Biscuits case.
In another recent case with a similar main dispute (whether the company pension fund could qualify as a special investment fund for Dutch VAT purposes and therefore the management services received could be exempt from VAT) at the same District Court, the ruling of the judges was more or less the same.
For more information on this subject, please contact Gert-Jan van Norden or Jochum Zutt.
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5. Further development of horizontal monitoring
The Dutch tax authorities have indicated that they will be overhauling the horizontal monitoring system. For example, a number of changes will gradually be introduced during the period 2020-2023. These changes will affect the individual compliance agreements concluded with the Dutch tax authorities. The Dutch tax authorities have indicated that during the course of this year client coordinators will contact organizations where the changes will have a noticeable effect.
The most important changes are:
- The emphasis of horizontal monitoring will shift to being able to jointly establish that tax returns filed by organizations under the compliance agreements are acceptable. For example, organizations will be expected to make a tax self-assessment and to establish the effectiveness of the tax control measures through internal monitoring, while the Dutch tax authorities will periodically discuss current tax issues and the outcomes of the internal monitoring.
- As of 2020, all existing compliance agreements will be valid for three years.
- For a selection of 100 large and complex multinationals, individual tax audit arrangements will be determined by the Dutch tax authorities depending on the quality of the internal monitoring process of the tax payer.
If you have any questions regarding this matter please contact Robert van den Tillaart.
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6. Notification from the Dutch tax authorities regarding cancellation of collateral debt obligation and collateral loan obligation rulings
The Dutch tax authorities recently notified Dutch CLOs and their advisors that all tax rulings confirming a VAT exemption for collateral management and administration for CLOs had been revoked and that the tax rulings would be cancelled with retroactive effect to April 1, 2019.
Previously, Dutch CLOs could benefit from the VAT exemption for the management of special investment funds for their collateral and administration services. The judgment by the Court of Justice of the European Union in the Fiscale Eenheid X case made it clear that funds should be subject to “specific state supervision” in order to benefit from the VAT exemption. It has long been unclear what the required specific state supervision exactly entailed. At the beginning of 2019 the Dutch Deputy Minister of Finance published the Specific State Supervision Policy Statement that took effect as of April 1, 2019. Since it did not explicitly mention Dutch CLOs, the Dutch CLO market feared that the continuation of previous policy would be in danger. According to the Dutch tax authorities, Dutch CLOs were not subject to specific state supervision as of April 1, 2019. As a result, Dutch CLOs are required to correct previous Dutch VAT returns retrospectively.
The revocation seems to mark the end of an era in which Dutch CLOs were able to benefit from the VAT exemption for the management of special investment funds. The notifications state that Dutch CLOs may contact the Dutch tax authorities to agree on a transitional period in order to adapt or restructure the current CLO structures. We would like to point out that the requirement of specific state supervision remains ambiguous. Some recent Dutch case law on this matter indicates that a license for individual investment management at the level of the manager would be sufficient to meet this requirement. However, this case law is contrary to the policy statement by the Deputy Minister of Finance, and a Dutch Supreme Court judgment on this issue is expected this year. While this would not directly help CLOs, it does indicate that the Dutch policy may be too narrow. Dutch CLOs may consider filing notices of objection to preserve their rights.
As a result of the revocation, we recommend that you check whether other Dutch VAT exemptions may apply to services supplied to Dutch CLOs. Furthermore, it may be possible to consider whether there are specific reasons which may justify a transition period during which the application of the exemption can be continued. If no Dutch VAT exemption applies, Dutch VAT would be payable on the collateral and administration services. Consequently, financial service suppliers should charge Dutch VAT or, if services are purchased from abroad, Dutch reverse-charged VAT must be reported by the fund itself.
For more information on this subject, please contact Niels Groothuizen, Gert-Jan van Norden or Irene Reiniers.
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7. The term ‘fixed establishment’ as used for VAT purposes is developing rapidly: a subsidiary could be a fixed establishment for VAT purposes
On May 7, 2020 the CJEU rendered judgment in the Dong Yang Electronics case (C-547/18). The case concerned whether a subsidiary may, for VAT purposes, constitute a fixed establishment, and, if so, how the service provider must determine whether it performs its services to the parent company or the fixed establishment.
The CJEU ruled that a close examination of VAT regulations reveals that a subsidiary may, in certain circumstances, be regarded as a fixed establishment for VAT purposes, but that a service provider does not have to examine the contractual relationship between the parent company and the subsidiary when determining whether it provides its services to the parent company or to a possible fixed establishment.
Please click here for the full alert.
Another preliminary ruling on the concept of a ‘fixed establishment’ has been requested by the Austrian Bundesfinanzgericht by the end of 2019 in the Titanium Ltd case (‘Titanium’, case no. C-931/19).
The case concerns a property letting company established on Jersey. The let property is located in Austria. The recently published question is whether the let property must be regarded as a fixed establishment for VAT purposes in Austria. If so, the property letting company has to charge Austrian VAT. The case is not only relevant for property letting companies, but potentially also for other VAT taxable persons with foreign activities, as it may provide a more detailed interpretation of the EU concept of fixed establishment. We will have to wait for the CJEU’s judgment, but it is clear that it can have implications for internationally operating businesses.
To read our full tax alert about the preliminary ruling request, please click here or for more information on this subject, please contact Gert-Jan van Norden, Irene Reiniers or Jochum Zutt.
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8. Dutch Supreme Court renders judgment on qualification of perpetual securities containing pari passu clauses
On May 15, 2020, the Dutch Supreme Court rendered judgment in a case concerning the qualification for tax purposes of perpetual securities containing a pari passu clause. In its judgment, the Supreme court provides an overview of previously rendered rules used to classify the provision of funds as debt or equity funding for Dutch tax purposes. The Supreme Court adds to the existing doctrine that the inclusion of a pari passu clause does not automatically hinder the qualification of a financing instrument as debt financing. A pari passu clause provides that the creditor, in the case of bankruptcy or dissolution and liquidation of the debtor, shares the same rank as preference shareholders.
A long-standing rule in Dutch tax law is that the civil law classification as equity or debt financing is indicative for the tax treatment thereof: when funding qualifies as equity funding for civil law purposes, the same qualification for tax purposes applies. However, instruments that do not qualify as equity for civil law purposes may still qualify as such for Dutch tax purposes. In determining the tax qualification of non-equity financing it is necessary to examine the civil law conditions of the financing instrument and establish whether a repayment requirement exists. It is established law that a conditional repayment requirement or uncertainty of repayment do not hinder meeting this requirement. In this case, the Dutch Supreme Court rules that the inclusion of a pari passu clause in the financing agreement does not hinder meeting the repayment requirement and as such, does not automatically mean a reclassification as equity for Dutch tax purposes.
The instruments in this case show similarities with Additional Tier 1 instruments (commonly referred to as Contingent Convertibles). Unfortunately, this judgment does not provide many relevant insights on the Dutch tax treatment of these instruments, for which the favorable regime under which these were tax deductible was canceled as of 2019. Pending cases may clarify whether conversion of these instruments into equity qualify as repayment and may further elaborate on the suspension of interest payments.
If you want to know more on this subject, please contact Niels Groothuizen.
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