Dear FS professional,
The first quarter of 2019 has come to an end and we are presenting our second FS Tax Newsletter for this year. In this newsletter, we have summarized the most recent tax-related developments in the FS sector for you.
This includes recent developments in case law, a policy statement regarding the VAT exemption on the management of Special Investment Funds, the introduction of a thin cap rule for banks and insurers and the published draft guidance by the Dutch regulator (DNB) on how banks and the trust sector can set up its systematic integrity risk analysis process.
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
Table of Contents
- 1. VAT policy statement on specific state supervision of investment funds and wider litigation
- 2. Internet consultation on the introduction of interest deduction limitation (thin cap rule) for banks and insurers launched
- 3. Dutch guidance on tax integrity risk for financial institutions and the trust sector
- 4. CJEU judgment on the VAT treatment of courses and seminars
- 5. FS VAT seminar 2019 ‘Power Up!’
1. VAT policy statement on specific state supervision of investment funds and wider litigation
On April 1, 2019, the Deputy Minister of Finance (hereinafter: Deputy Minister) published the Specific State Supervision Policy Statement, effective April 2, 2019. In this policy statement the Deputy Minister elaborates on the qualification ‘specific state supervision’, which the Court of Justice of the European Union (hereinafter: CJEU) imposed as one of the conditions for applying the VAT exemption for the management of special investment funds (Article 135(1)(g) EU VAT Directive). Please to read our more in our Tax alert.
We note that the criterion “state supervision” has recently been the subject of litigation. A recent decision of the Dutch Lower Court of Noord-Holland has cast some doubt as to whether a pension fund is under sufficient state supervision for the purpose of the VAT exemption. The new policy statement makes it clear that this is the case. Notably, the Dutch Lower Court decided that one of the other criteria for application of the VAT exemption for management of special investment funds was not met. In the view of the Lower Court, the members of the pension fund did not bear a risk that is sufficiently comparable to a special investment fund, which is one of the other requirements for the VAT exemption. As such, the services provided to the pension fund did not qualify for exemption. This case is likely to proceed to the higher court.
Further, in the December 2018 issue of our FS Tax Newsletter, we updated you on a groundbreaking judgment of the Amsterdam Court of Appeals. The Court of Appeals had ruled that the VAT exemption can also apply to products that are offered under a license for individual investment management where individual assets are pooled. The Court of Appeals found that the state supervision under a license for individual investment management was comparable to the state supervision that takes place in respect of the management of a special investment fund. On February 15, 2019, the Court of Appeals of Arnhem-Leeuwarden came to the same decision. We note that the policy statement explicitly states that an investment manager with an individual investment management license from the AFM is not subject to sufficient state supervision for the purpose of the VAT exemption. It is still to be decided whether the policy statement will continue to be valid after the above cases have progressed to the Dutch Supreme Court.
2. Internet consultation on the introduction of interest deduction limitation (thin cap rule) for banks and insurers launched
On March 18, 2019 the Dutch government launched an internet consultation offering interested parties the opportunity to respond to the draft bill that introduces the thin cap rule for banks and insurers. The internet consultation closes on April 15, 2019.
The thin cap rule will limit the interest deduction for tax purposes if banks and insurers have excessive debt. Initially, the interest deduction was to be limited to that part of the debt exceeding 92% of the balance sheet total for accounting purposes. The government has now abandoned this by not linking this percentage to the balance sheet total for accounting purposes, but by aligning it as much as possible with variables familiar to the sector.
For banks, the consolidated leverage ratio in the Capital Requirements Regulation has been used to determine whether there is a shortage of equity. In the case of a bank located outside the EU/EER with a direct interest in a bank located in the Netherlands, the leverage ratio will be determined and published on an individual basis.
According to the draft regulation, there is a shortage of equity if the leverage ratio of a bank or banking group is less than 8%. Insofar as there is a shortage of equity, a (8-L)/(100-L) part of the annual interest expense payable on loans (interpreted in accordance with the definition used for the generic interest deduction limitation) is excluded from deduction. L represents the percentage of the leverage ratio rounded-off to one decimal point. The fraction’s numerator (8-L) is the shortage of equity, expressed as a percentage. The fraction’s denominator (100-L) is the percentage share of the debt in, briefly put, the adjusted balance sheet total. The outcome of the fraction, multiplied by the interest expense on the loans, is the non-deductible part of the interest expense on those loans.
For insurers, the ‘equity ratio’ in the Solvency II Regulation has been used to determine whether there is a shortage of equity as insurers do not have a leverage ratio. The ratio is, in principle, determined at the group level, but there are two exceptions: when the equity ratio cannot be determined on the basis of the group report or in the case of an insurer with limited risk exposure. In the first situation the equity ratio will be determined on the basis of the ratio between the equity of the taxpayer and the balance sheet total as determined by the solvency report and financial position according to the Solvency II Regulation. In the second situation, the equity ratio is based on the Solvency II balance sheet found in the notes to the financial statements, which must be included according to the Financial Supervision Act (Wet op het financieel toezicht / Wft)
There is a shortage of equity if the equity ratio of an insurer or insurance group is less than 8%. Insofar as there is a shortage of equity, a (8-ER)/(100-ER) part of the annual interest expense payable on loans (also interpreted in accordance with the definition used for the generic interest deduction limitation) is excluded from deduction. In this fraction, ER stands for equity ratio. The fraction’s numerator (8-ER) is the shortage of equity, expressed as a percentage. The fraction’s denominator (100-ER) is the percentage share of the debt in the adjusted balance sheet total. The outcome of the fraction, multiplied by the interest expense on the loans, is the non-deductible part of the interest expense on those loans.
Finally, Meijburg notices that the draft bill is leading to a lot of questions, which hopefully will be answered before this legislation comes into effect. See our tax alert of March 25, 2019 and/or contact Niels Groothuizen, Bart Jimmink, Michèle van der Zande, Otto van Gent, Eveline Gerrits or one of our other FS Tax Professionals for more information about this draft bill.
3. Dutch guidance on tax integrity risk for financial institutions and the trust sector
The Dutch regulator (De Nederlandsche Bank (DNB)) requires that financial institutions and the trust sector take measures to guarantee business integrity. In order to gain an adequate insight into the type of integrity risks that may occur with banking/trust customers, banks/trust offices have to carry out a systematic integrity risk analysis (SIRA).
The tax integrity risk analysis as part of this SIRA should specify the tax risk appetite, as perceived by the customer portfolio and relevant customer acceptance conditions of a bank/trust office. Since the harmful effects of tax avoidance through banks/trust offices might affect the trust in the Dutch financial sector and/or the reputation of the Netherlands, banks/trust offices are required to investigate the fiscal motives of their clients.
On February 7, 2019 DNB published draft guidance on how a bank can set up its SIRA process, such that fiscal integrity risk related to clients can be identified and managed better. On March 25, 2019 KPMG Meijburg & Co attended a roundtable meeting organized by DNB to discuss this draft document, with the definition of tax integrity risks, as well as the status and scope of the draft guidance, being discussed. This meeting was very constructive and we are currently awaiting follow-up from DNB. The consultation period has been extended to April 21, 2019.
In addition to the above, DNB has published draft guidance on how the Trust sector can set up its SIRA process. On March 20, 2019 DNB organized a roundtable meeting to discuss this draft document. Should you have any questions in respect of this matter, please contact Niels Groothuizen, Michèle van der Zande, Jeroen Bruggeman or Mark Theunissen.
4. CJEU judgment on the VAT treatment of courses and seminars
The European Court of Justice has made a decision in the Srf konsulterna AB (C-647/17) case that deals with the place of supply for courses and seminars. In this case, the courses were organized by a company that is wholly owned by a professional association for accounting, management and salary consultants. It provides accounting and management courses in the form of seminars for the members of that association and also to third parties. The training courses were given at a conference center and lasted 30 hours, spread over five days. Most of the courses were provided in Sweden, but some had taken place in other EU member states, in which case the trainers of that association travelled to those EU member states. The courses were only provided to taxable persons whose business is established or who have a fixed establishment in Sweden. The question was whether such courses and seminars were taxable at the location where they were held or at the location where the recipient was established.
The European Court of Justice ruled that the courses and seminars should be regarded as ‘services in respect of admission to events’. In that case, the place of supply is the place where such event, course or seminar actually takes place and the supplier should charge local VAT to the participants.
In practice, we see that short-term training services are often treated as general business-to-business services, where the VAT will be reverse charged to the recipient. We recommend to analyze whether such treatment is still correct after this decision. Notably, the determination of the place of supply is quite fact-specific. If you have any questions about this case, please reach out to your local Meijburg contact person.
5. FS VAT seminar 2019 ‘Power Up!’
On Thursday, April 4, 2019, we hosted the annual Meijburg event FS VAT seminar in Amstelveen. The theme of the seminar was “Power Up!”. Under this banner, we paid attention to the constantly changing playing field, and in particular the positive effect that innovation can have on our client’s VAT position.
A broad spectrum of players in the FS sector were present, including Dutch banks, insurers, asset managers and foreign financial institutions, as well as various Fintech parties. Technical discussions were addressed with a multidisciplinary approach, the goal being to collaboratively identify multiple genuine ‘Power Ups’.
The seminar started with a presentation about recent developments in the field of Dutch VAT. Can Brexit, recent and expected (EU) case law and new Dutch legislation be regarded as a ‘Power Up’? During this plenary session we discussed the actual influence of these topics on the VAT practice.
The plenary session was followed by five individual workshops: i) Tax Technology & Innovation, ii) Portfolio management, iii) Real Estate, (iv) Procedural Dutch law and v) input VAT recovery. This session offered the opportunity to address several practical issues in smaller groups in more detail in order to delineate practical solutions. The interactive sessions were greatly appreciated by the participants.
We finished the official part of the FS VAT Seminar by means of a lottery, under the supervision of our in-house notary, in which one of the participants won a drone. Our in-house notary is part of Meijburg Legal, which allows us to offer integrated tax and legal business solutions.
We concluded our seminar with an informal get-together, enabling participants to catch up on and personally discuss a number of topics in more detail.
If you would you like to be kept informed about the next seminar, please send an email to Nicole Koning.