FS Tax Newsletter | August 2021
Dear FS professional,
This is our fourth FS Tax Newsletter for the year, in which we summarize the tax-related developments of the last two months in the FS sector for you.
First, we discuss the recent judgments by the Court of Justice of the European Union (CJEU) in the following three VAT cases: in the Titanium case the CJEU ruled on the conditions under which a foreign taxable person has a fixed establishment for VAT purposes, while in the DBKAG and K cases the CJEU further defined the scope of the term ‘management’ within the meaning of the exemption for the management of special investment funds. Staying with VAT, we also discuss the new Dutch decree on the VAT position of supervisory officers, which clarifies and expands on the VAT position of these officers.
We then take a look at two Dutch Supreme Court judgments, the first concerning the deduction of interest on a loan to finance an acquisition, and the second an acquisition structure and the application of the fraus legis doctrine.
Lastly, we briefly discuss recent parliamentary developments: in a letter to the Dutch Lower House of Parliament, the Deputy Minister of Finance announced that the changes to the definition of Dutch mutual funds will no longer be part of the draft bill on the Qualification Policy for Legal Forms Act.
If you would like to know more about the matters addressed in this newsletter please contact us. For other 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. CJEU’s K and DBKAG judgment: right to use software can qualify as VAT-exempt asset management
- 2. Without own staff, no fixed establishment for VAT purposes in the case of let property
- 3. Update on the Dutch VAT position of members of supervisory boards, boards of supervisory directors and comparable committees
- 4. Supreme Court judgment on interest deduction on group loan
- 5. Fraus legis prevents interest deduction in acquisition structure
- 6. New definition for mutual funds no longer part of draft bill on the Qualification Policy for Legal Forms Act
1. CJEU’s K and DBKAG judgment: right to use software can qualify as VAT-exempt asset management
On June 17, 2021, the CJEU ruled on the scope of the term ‘management’ within the meaning of the exemption for the management of special investment funds. In short, according to the CJEU, both the right to use software (the DBKAG case) as well as specific administrative services (the K case) could qualify as a VAT-exempt management service. The fact that the right to use software can itself fall within the VAT exemption is a welcome clarification for Dutch practice in light of the increasingly automated asset management market. The CJEU’s judgment is also relevant for parties that provide specific administrative services to asset managers, as well as asset managers that purchase such services from abroad.
The CJEU ruled that the services in the present cases may fall under the exemption for the management of special investment funds. According to the CJEU, it is not necessary for specific services to be outsourced in their entirety.
Overall form a distinct whole
The CJEU first addresses the condition that the outsourced services must, viewed broadly, form a distinct whole. In both the K case and the DKBAG case, certain functions were outsourced to a third party, but some of the responsibilities remained with the fund manager. In addition, the outsourcing did not release the fund manager from its legal obligations. Given the objective of the exemption, the CJEU ruled that there is no requirement for a particular task be outsourced in its entirety.
The CJEU subsequently addresses the requirement that the outsourced service must be specific and essential to the activities of a fund manager. The typical tasks of a manager listed through the UCITS Directive are in principle eligible for the exemption, insofar as these are specific and essential. According to the CJEU, outsourced administrative services fulfilling a tax task can be regarded as VAT-exempt management insofar as they are specific and essential to fund management.
Although the CJEU appears to follow the reasoning of K and DBKAG, the case has not yet been finally won because the CJEU has instructed the referring court to determine whether the outsourced services are intrinsically related to and thus are specific and essential to the management of special investment funds.
For more information on this matter, please follow this link or contact Gert-Jan van Norden, Jochum Zutt or Niels Wenting.
2. Without own staff, no fixed establishment for VAT purposes in the case of let property
On June 3, 2021 the Court of Justice of the European Union (‘CJEU’) rendered judgment in the Titanium Ltd case (case no. C-931/19). The referring Austrian court wanted to know from the CJEU under what conditions a foreign taxable person has a fixed establishment in Austria for VAT purposes. The CJEU ruled that a foreign taxable person that does not have its own staff in situ in a Member State cannot have a fixed establishment for VAT purposes in that Member State either.
The Austrian court is asking the CJEU for a more detailed interpretation of the ‘fixed establishment concept’. What the referring Austrian court wants to know from the CJEU is whether the fixed establishment concept must involve the use of own staff and technical resources (the property company does not have those in Austria), or whether there can also be a fixed establishment without the deployment of own staff (but with the aid of the services of a property manager).
According to settled case law of the CJEU, a fixed establishment must, for the purposes of VAT, have a certain degree of permanency by having permanent human and technical resources necessary for certain services. Thus, there must be a certain degree of permanence and an appropriate structure – in terms of staff and technical equipment – to enable the services in question to be performed (or procured) independently. The CJEU emphasizes that a structure that does not have its own staff cannot fall within the scope of the concept of a fixed establishment. According to the CJEU, a building for which there is no staff available so that it cannot act independently does not meet the criteria to be regarded as a fixed establishment.
The judgment is in line with Dutch practice, but we know from experience that other EU Member States are quicker to conclude that a fixed establishment exists. We also see that the concept of fixed establishment for VAT purposes is constantly changing. On July 22, 2020, a Romanian court in the Berlin Chemie case (C-333/20) sought a preliminary ruling from the CJEU about the fixed establishment concept. The CJEU has not yet ruled on the case.
For more information on this matter, please follow this link or contact Gert-Jan van Norden, Jochum Zutt or Niels Wenting.
3. Update on the Dutch VAT position of members of supervisory boards, boards of supervisory directors and comparable committees
On August 2, 2021 a new decree on the Dutch VAT position of members of supervisory boards, boards of supervisory directors, complaints advisory committees and review, dispute and comparable committees (hereinafter: supervisory officer(s)) was published. This decree is a clarification and expansion of the decree of April 28, 2021 (see our previous alert).
Supervisory officers who, in the context of their position, during the period until May 7, 2021 charged Dutch VAT to the organization where they are a supervisory officer, do not have to correct this, regardless of whether the organization is/was entitled to recover input VAT. These supervisory officers and comparable persons may however choose to correct the Dutch VAT charged.
It is now explicitly approved that these persons may leave their own Dutch VAT recovery intact.
In addition, it has been explicitly approved that the Dutch VAT on capital goods that are part of the operating assets for which the supervisory officers and comparable persons were charged VAT before May 7, 2021 does not have to be adjusted. Therefore the VAT already recovered on the capital goods does not have to be corrected, not even in the future.
For more information on this matter, please follow this link or contact Gert-Jan van Norden, Max van de Ven or Niels Wenting
4. Supreme Court judgment on interest deduction on group loan
On Friday, July 9, 2021 the Supreme Court rendered judgment on the deduction of interest on a loan to finance an acquisition, in a case in which interest costs were also deductible in other countries due to hybrid elements in the group structure (ECLI:NL:HR:2021:1102). The Supreme Court dismissed the appeal in cassation by the Deputy Minister of Finance.
Arm’s Length
It can be deduced from the considerations by the Supreme Court that financing the acquisition of participations by means of loans is an arm’s length event. Therefore, the interest that is payable is an arm’s length expense, also if this concerns group loans, provided the conditions for the group loans were determined in accordance with the arm’s length principle.
Anti-abuse rules
According to the Court of Appeals, there was sufficient parallelism between the group loan and the third party loans. This was not altered by the fact that an entity involved with the financing structure was a hybrid entity, i.e. an entity that is regarded as a transparent entity by one country and as a non-transparent entity by another.
Fraus legis
the Supreme Court concluded that using the asymmetrical treatment of benefits from a foreign participation (exempt under the participation exemption) and of costs related to that participation (deductible since the judgment, known as the ‘Bosal judgment’, by the Court of Justice of the European Union of September 18, 2003, ECLI:EU:C:2003:479) is not contrary to the spirit and intent of the law. This is only otherwise if the interest costs are set off against acquired profits or against benefits created in another artificial manner.
For more information on this matter, please follow this link or contact Otto Marres or Michael van Gijlswijk.
5. Fraus legis prevents interest deduction in acquisition structure
On July 16, 2021 the Supreme Court rendered judgment on the deduction of interest on a loan to finance an acquisition by an investment fund (ECLI:NL:HR:2021:1152). The Supreme Court ruled that the Amsterdam Court of Appeals had correctly held that the interest was non-deductible.
In the judgment discussed in the previous item, in which there was also an acquisition structure, the taxpayer’s full interest deduction was maintained, because the Court of Appeals had been able to establish that the interest expenses were, in fact, payable to third parties. In the case at hand, the equity available within the group was onlent to the taxpayer. To that extent, the difference in outcome between these cases is explicable. However, it does not alter the fact that the judgment raises questions.
In this judgment the invocation of fraus legis was acknowledged on the basis of the Court of Appeals’ ruling “that in a – in a decisive sense – tax-driven manner, with the interposition of Dutch intermediate holding companies and the creation of a (other than on tax grounds) pointless loan relationship – and to that extent in an artificial way – the aim to eventually realize capital gains by the purchase and sale of companies is achieved.” Based on the freedom to use a Dutch company, and on the circumstance that an external acquisition was being financed, it is unclear which circumstances justify the conclusion that the debt was pointless. The judgment would be better placed in line with case law if the use of the FCPRs had been assessed as a non-business motivated diversion. It now remains somewhat obscure in which cases (for example where a group raises capital and onlends it to a Dutch company which uses the capital to finance an acquisition) there is a non-business motivated diversion of funds.
For more information on this matter, please follow this link or contact Otto Marres or Michael van Gijlswijk.
6. New definition for mutual funds no longer part of draft bill on the Qualification Policy for Legal Forms Act
In the previous edition of our FS Tax Newsletter, we brought to your attention the Internet consultation on the Qualification Policy for Legal Forms Act. By letter dated June 2, 2021 the Deputy Minister of Finance announced that this draft bill would not be part of the 2022 Tax Plan to be presented in September, but that the results of the internet consultation will instead be included in a separate draft bill that is expected to be published this winter.
In a subsequent letter, dated July 1, 2021, the Deputy Minister of Finance stated that the internet consultation had received a large number of submissions, with many discussing the newly proposed definition of Dutch mutual funds (“fondsen voor gemene rekening”). From the submissions it has become clear that the proposed definition may have serious consequences for institutional investors, such as pension funds and insurance companies. Recognizing that these investors regularly apply special corporate tax regimes, the new definition will be reviewed in conjunction with these regimes. As the outcome of the current evaluation of these regimes is not expected until the first quarter of 2022, it has been decided that the definition of mutual funds will not be part of the draft bill but will be reviewed later in a broader context.
For more information on this matter, please contact Michael van Gijlswijk, Otto Marres, Fred van Horzen, Annemiek van Dijk, Jan-Pieter van Niekerk or Maarten Merkus.
