Dear FS professional,
This edition of our newsletter provides an update on developments in the financial services sector, such as the agreement signed by the US and the Netherlands with respect to FATCA and the tax treatment of Tier 1 capital. Updates on proposed legislation and court proceedings are also discussed.
In addition to this newsletter, KPMG Meijburg & Co organizes seminars to keep you updated on developments in the financial services sector. Upcoming seminars are:
- A seminar on pensions “On the road to an in-house meeting on Pensions” (Thursday, March 20, 2014);
- A seminar on VAT “Foresight is the essence of government” (Thursday, April 17, 2014).
Please click on the seminar of your choice for more information about the program and registration details.
In addition to this newsletter, KPMG Meijburg & Co organizes seminars to keep you updated on developments in the financial services sector. An overview of our seminars can be found here.
If you would like to read more about recent developments in the financial services sector, please download KPMG’s Frontiers in Tax publication, which has articles on the European Financial Transaction Tax (FTT), the automatic exchange of information, Developing business models and structures, Optimizing VAT and Transfer Pricing in a changing world.
Partner, Financial Services Tax Group
Table of Contents
- 1. EU Advocate General: management of pension funds administering a defined contribution scheme is exempt from VAT
- 2. Pension scheme administration services to be excluded from Dutch cost sharing exemption
- 3. Intergovernmental Agreement between the Netherlands and the U.S. regarding FATCA
- 4. The Supreme Court requests preliminary rulings on the levying of dividend withholding tax
- 5. Tax treatment of additional Tier 1 capital
- 6. European Commission proposes amendments to Parent-Subsidiary Directive
1. EU Advocate General: management of pension funds administering a defined contribution scheme is exempt from VAT
The Advocate General (AG) attached to the Court of Justice of the European Union (CJEU) recently published his opinion in the ATP Pension Service A/S case (case no. C-464/12) on the VAT treatment of the management of pension funds administering defined contribution schemes.
At issue in this case was the interpretation of ‘special investment fund’ as referred to in Article 135(1)(g) EU VAT Directive. In the Wheels case (case no. C-424/11), the CJEU ruled that pension funds that administer defined benefit schemes do not qualify as a special investment fund, because such funds are not open to the public, and the employees do not bear the risk arising from the management of these funds.
The AG lists several criteria which are, in his opinion, relevant to the interpretation of ‘special investment funds’. The AG concludes that pension funds should pool the assets of several beneficiaries, and allow investment risk to be spread over a range of securities. According to the AG, this is the case where beneficiaries bear the risk of the investment.
Although the criteria set by the AG would appear to apply to pension funds administering defined contribution schemes, it remains to be seen whether the CJEU will follow the AG’s opinion and whether Dutch pension funds administering such schemes could be eligible for a VAT exemption.
2. Pension scheme administration services to be excluded from Dutch cost sharing exemption
The Dutch government has recently reached agreement on the new framework for the funding of pension schemes. To cover part of the costs of the new framework, services related to the administration of pension schemes will be excluded from the Dutch cost sharing exemption as of January 1, 2015.
Currently, suppliers of pension scheme administration services that render these services under a cost sharing association are entitled to a VAT exemption. Consequently, the service providers do not charge pension funds VAT on these activities.
It is expected that pension scheme administration services will be included on a list of services that are to be explicitly excluded from the VAT cost sharing exemption as of January 1, 2015. Since pension funds have a limited right to recover input VAT, the VAT charge for pension scheme administration services will lead to additional costs at the level of the pension fund. This measure will not improve the VAT position of pension funds. Whether or not the measure will indeed result in increased VAT costs will partly depend on the outcome of the ATP Pension Service A/S case, (case no. C-464/12) currently pending before the CJEU (discussed under section 1 above). A positive ruling from the CJEU could result in pension scheme administration services remaining exempt from VAT.
3. Intergovernmental Agreement between the Netherlands and the U.S. regarding FATCA
On December 18, 2013, representatives of the Netherlands and the United States signed an intergovernmental agreement (“IGA”) for the automatic exchange of data between the tax authorities of both countries, thus implementing the U.S. legislation known as the Foreign Account Tax Compliance Act (“FATCA”).
The IGA is largely based on the Reciprocal Model 1A IGA version that was published by the U.S. Treasury on November 4, 2013. In addition to certain standard advantages that follow from signing this model IGA, Annex II provides some specific entity and product exemptions. Moreover, a Memorandum of Understanding (“MOU”) has been published, which in certain situations provides some additional relief and clarifications in terms of the applicable FATCA requirements.
The signing of the IGA brings certain general advantages with it, including:
- a reduction in the administrative burden for Dutch financial institutions, while guaranteeing legal protection for their clients;
- Dutch financial institutions no longer need to conclude agreements with the U.S. tax authorities separately. Instead, each nation’s tax authorities will exchange the data. Dutch legislation will be amended to that end;
- under the agreement, beginning September 2015, the Dutch Tax and Customs Administration will automatically exchange data with the U.S. Internal Revenue Service. The Dutch Tax and Customs Administration will also receive data on Dutch taxpayers from the United States.
Annex II to the IGA provides exemptions or reduced FATCA requirements for specific categories of entities and products.
For example, the following Dutch entities that might otherwise be considered Financial Institutions are considered to be Exempt Beneficial Owners, treated as Non-Reporting Netherlands Financial Institutions under the IGA, meaning that they will be exempt from the FATCA due diligence and reporting requirements:
- certain governmental entities;
- certain international organizations;
- pension funds that meet certain conditions;
- an investment entity that is wholly owned by exempt beneficial owners.
The following entities are considered to be Deemed-Compliant Financial Institutions, which are also treated as Non-Reporting Netherlands Financial Institutions under the IGA:
- financial institutions with a local client base, provided conditions are met;
- non-profit organizations that serve a charitable purpose (e.g., “ANBIs”, “SBBIs”);
- funds that are exempt from Dutch corporate income tax and have been set up by a labor union to provide benefits to its members (stakingskassen);
- certain investment managers and investment advisors, provided conditions are met;
- certain collective investment vehicles, provided conditions are met.
The following products and accounts maintained by a Dutch financial institution are not treated as Financial Accounts, meaning that they will not be reportable accounts under FATCA:
- any account owned by an Exempt Beneficial Owner;
- certain retirement and other tax-favored products such as annuities (lijfrenten), contributions to an annuity savings account (lijfrentespaarrekening), tax-efficient blocked annuity investment accounts (lijfrentebeleggingsrechten), special leave accounts (levenslooprekeningen) and insurance under a special leave plan (levensloopverzekering);
- certain products that are linked to Dutch real property such as mortgage-linked endowment insurance (kapitaalverzekering eigen woning) and tax-efficient blocked investment accounts for mortgage repayment (beleggingsrechten eigen woning);
- funds received in relation to the termination of a labor contract (i.e., annuity entitlements; stamrechten);
- funeral insurance policies (with premiums up to EUR 1,000 per annum).
The MOU provides the following additional guidance:
- a Dutch Stichting Administratiekantoor (“STAK”) is to be considered as a passive NFFE, unless the interests in the STAK are regularly traded on an established security market (such as the NYSE Euronext Amsterdam). This means that a STAK may be subject to FATCA reporting requirements depending on whether it has Controlling Persons that are US citizens or residents;
- a depositary (bewaarder, bewaarinstelling or bewaarbedrijf) is not regarded as a Financial Institution, or as an Account Holder by a maintaining Financial Institution under FATCA, provided conditions are met. This means that these depositaries will not have to perform FATCA due diligence and reporting, nor will they be subject to FATCA reporting requirements;
- an account held by a foundation (Stichting Derdengelden) is not a reportable account or an account held by a Non-participating Financial Institution if the assets of the foundation serve solely as an escrow for a debt or purchase obligation.
4. The Supreme Court requests preliminary rulings on the levying of dividend withholding tax
On December 20, 2013, the Supreme Court requested preliminary rulings from the Court of Justice of the European Union (CJEU) on three cases involving the levying of Dutch dividend withholding tax. Two cases concern dividend withholding tax levied on private Belgian shareholders in Dutch companies. The third case involves dividend withholding tax levied on a French bank. In one of these cases, the proceedings were instigated by KPMG Meijburg & Co on behalf of one of its clients.
Belgian private investors
For a foreign private investor, 15% dividend withholding tax is payable in the Netherlands on the dividend actually distributed by Dutch resident companies, while a Dutch investor’s shareholding is taxed in box 3 at 1.2% (the deemed fixed return of 4% is taxed at 30%). Dutch investors are effectively not subject to dividend withholding tax, because they can credit the withheld dividend withholding tax or request a tax refund.
The Supreme Court has requested the CJEU to rule on whether the dividend withholding tax levied on foreign investors must be comparable to the income tax levied on domestic investors. If the answer to this question is affirmative, foreign investors will need to calculate a deemed Dutch tax on their shareholdings. If this deemed Dutch tax is less than the Dutch dividend withholding tax, the difference may have to be repaid to the investor.
The Supreme Court has drawn up a number of subsequent questions with regard to how this deemed Dutch tax should be calculated. This is particularly complicated, as the dividend withholding tax levied on the actual dividends received differs significantly from the tax levied in box 3 on the deemed income from shareholdings. For example, box 3 entitles Dutch investors to deduct the value of their liabilities and to apply a tax-free amount to their total assets. There is no comparable tax relief with respect to dividend withholding tax for foreign investors. Also, the deemed income in box 3 not only relates to dividend income, but also to capital gains. The tax base in box 3 is therefore broader than the dividend withholding tax.
And finally, a preliminary ruling was requested on the possibility of Dutch tax being set off abroad.
The French bank
The issues involved in the French bank case are similar. A French bank is subject to Dutch dividend withholding tax on the dividends it receives. A comparable Dutch bank would be subject to corporate income tax on the dividends it receives. Even though the Dutch tax to which the French bank is subject is lower than that of a comparable Dutch bank, the Dutch bank can deduct costs.
The Supreme Court has – in addition to the comparability of both situations − requested a preliminary ruling on the costs that French banks may take into consideration. Does this include all the costs that are, from an economic perspective, associated with the shares? For example, how should the financing costs related to the purchase of shares be dealt with? Also in this case, questions were raised on the crediting of Dutch dividend withholding tax against French corporate income tax.
Comments by KPMG Meijburg & Co
The levying of dividend withholding tax on foreign shareholders is an issue throughout Europe. It can be concluded from CJEU case law that a foreign shareholder cannot be taxed more heavily than a comparable domestic shareholder. By requesting these preliminary rulings, the Supreme Court is trying to gain more clarity on the comparability factor as it applies in EU law and how this is relevant to Dutch dividend withholding tax. If the questions presented by the Supreme Court are answered in the affirmative, then the levying of Dutch dividend withholding tax will become more complicated than it is at present. It then needs to be decided whether the revenue received from dividends is worth the costs involved in collecting it, or whether it would actually be better to abolish dividend withholding tax.
As appropriate, we recommend either filing an objection or an appeal, or expounding on the objection or appeal grounds by referring to the questions raised by the Supreme Court.
5. Tax treatment of additional Tier 1 capital
On December 16, 2013, the Deputy Minister of Finance announced by letter that banks will be able to deduct, for tax purposes, the return on additional Tier 1 capital, even if it was issued after January 1, 2014.
Hybrid capital instruments (i.e. additional Tier 1 capital) consisting of both equity capital and debt can, to a limited degree and subject to conditions, be included in the core capital. Hybrid instruments are distinguished on the basis of their innovative character, i.e. whether or not specific conditions apply that act as an incentive for early repayment. For tax purposes, the Netherlands regards additional Tier 1 capital that is issued under the current capital requirements framework as debt, which means that the return is tax deductible.
As of January 1, 2014, the Capital Requirements Directive will apply, on the basis of which additional Tier 1 capital that is issued after January 1, 2014, can no longer be regarded as debt. The related interest will therefore no longer be deductible. However, in his letter of December 16, the Deputy Minister indicated that banks will be able to deduct, for tax purposes, the return on additional Tier 1 capital, even if issued after January 1, 2014, and that this will be taxed at the recipient.
6. European Commission proposes amendments to Parent-Subsidiary Directive
On November 25, 2013, the European Commission proposed amendments to the EU Parent-Subsidiary Directive (“the Directive”) in order to close perceived loopholes for corporate tax avoidance. The proposals consist of an amended anti-avoidance rule and changes to exclude payments on cross-border hybrid loans from a tax exemption.
The issue of corporate tax avoidance is very high on the political agenda of many EU and non-EU countries, and the need for action to combat it has been highlighted at recent G20 and G8 meetings. The EU supports this and the Commission published an action plan in December 2012 which included proposals to address perceived loopholes in the Directive (see client memorandum December 2012).
On May 22, 2013, the EU reached political agreement on the need for a coordinated approach to fighting base erosion and profit shifting and aggressive tax planning, including a revision of the Directive to be presented by the Commission by the end of 2013.
The primary aim of the Directive is to prevent double taxation of the same income between members of a corporate group that are based in different Member States. This is achieved by providing for a withholding tax exemption on distributed profits and an exemption or credit for the recipient. The current proposals are aimed at preventing certain perceived abuses of these rules.
Scope of proposed amendments
As envisaged by the European Commission’s action plan of December 6, 2012, the current proposals are aimed at preventing certain tax avoidance strategies and tackling hybrid financial mismatches.
The first change would be an amendment of the anti-abuse provision in the Directive. This ensures Member States adopt a common standard to prevent avoidance of the Directive so that its benefits are only granted on the basis of real economic substance. Specifically, the benefits under the Directive will not apply in the case of “artificial arrangements” put in place with the “essential purpose of obtaining an improper tax advantage”. For these purposes, arrangements are artificial if they do not reflect “economic reality”. The proposal also lists a number of situations that are relevant for the existence of artificial arrangements. In its accompanying memo, the Commission gives as an example of the kind of structure that could be impacted by this rule, and thus be denied the benefits of the Directive, i.e. an intermediate holding company, described as a “letter box company with no substance” that is inserted into a structure in order to avoid withholding taxes in a Member State.
The second change as envisaged in the Commission’s proposal would deny the benefits of the Directive to specific tax planning arrangements such as hybrid loan arrangements. The Commission gives as an example the case where a loan is treated as debt in the Member State of the debtor/subsidiary and as equity in the Member State of the lender/parent, so that payments on the loan are deductible in the former and exempt in the latter Member State. Under the proposed amendment, the payments would no longer be exempt in the latter Member State, which therefore will tax the portion of the payments that is deductible in the Member State of the paying subsidiary.
Member States are expected to implement the amended Directive by December 31, 2014. However, the proposal must first be approved by the EU Parliament and the Member States themselves.
Comment KPMG Meijburg & Co
The current proposals should be seen as part of the increased efforts at the international level to combat aggressive tax planning. As such, the proposal aimed at hybrid loan arrangements could have an impact on certain group financing arrangements where such arrangements are not already limited under domestic rules. The Directive already contains a provision allowing Member States to apply domestic anti-abuse rules and the practical impact of the proposed amendment will therefore depend on the existing application of such rules in individual Member States.