Dear FS professional,
We are pleased to present you with the April issue of the FS Tax Newsletter. In this issue we look at the Capital Requirements Directive IV (which implements Basel III in the EU) and the revised Decree on Fiscal Investment Institutions, provide an overview of the highlights of our FATCA seminar and discuss the Supreme Court judgment concerning the valuation of shares and options at the level of a market maker. Finally, two VAT court cases are also discussed: the CJEU judgment in the ”ATP PensionService A/S” case and the judgment of the Dutch Supreme Court which ruled that road assistance services fall within the scope of the insurance premium tax.
KPMG Meijburg & Co will also be organizing several seminars in the coming months:
- the FS VAT seminar “Regeren is vooruitzien” (Thursday April 17, 2014).
- the FS seminar on insurance companies (Tuesday May 27, 2014)
Please click here to view our seminar calendar for more information about the program and registration details.
Partner, Financial Services Tax Group
Table of Contents
- 1. Update on CRD IV
- 2. Revised Decree on Fiscal Investment Institutions
- 3. Highlights of our FATCA seminar (March 21, 2014)
- 4. Ruling on the valuation for tax purposes of a market maker’s positions in shares and options
- 5. Avoidance double bank levy
- 6. VAT exemption for the management of special investment funds can be applied to services provided to pension funds that operate defined contribution schemes (“DC schemes”)
- 7. The Supreme Court: road assistance services fall within the scope of Insurance Premium Tax
1. Update on CRD IV
As already mentioned in this newsletter, the Capital Requirements Regulation (CRR) was published in the Official Journal of the European Union on June 27, 2013. The CRR is part of CRD IV - the legislation implementing Basel III within the European Union.
This legislation tightens the capital rules for credit institutions and investment firms, with taxes being an important part of the calculation for the amount of capital that banks must hold. The impact of this legislation is discussed by Michèle van der Zande and Eveline Gerrits in an article they wrote for the Weekblad Fiscal Recht and which was published in edition WFR 2014/259. A translation of this article is attached to this FS newsletter (PDF, 182KB).
The impact is considerable and the calculation method is not only complicated but deviates on some points from IAS 12. KPMG Meijburg & Co is therefore offering a training course in which the basics of IAS 12 will be explained as well as how they can be applied to the CRR. The training course will take approximately three hours. You can register via Esther Zandvliet-de Groot
2. Revised Decree on Fiscal Investment Institutions
The Dutch Deputy Minister of Finance has published a new Decree on Fiscal Investment Institutions (Fiscale beleggingsinstellingen) (“FII”), no. BLKB2014/15M. The decree is a revised version of the decree of 15 September 2009, no. CPP 2009/813M, which it replaces, and includes two additional approvals: one on real estate investment funds and one for investment funds using separate share classes.
1. Double distribution of income
Listed real estate investment funds regularly distribute dividends from profits that have been reported for financial reporting purposes, but that have not been realized for tax purposes, for example the profit from the disposal of real estate by a subsidiary of the FII. When this result from the disposal of real estate is actually distributed by the subsidiary to the FII it is part of the distribution obligation of the FII as well. As a consequence this result should then be distributed (again) by the FII. To prevent such a double distribution, the decree includes an approval allowing the FII to treat the dividend received from its subsidiary as acquired dividend, provided certain conditions are met.
Exemption equal distribution obligation in relation to share classes
An FII is required to distribute its profit within eight months of the end of each financial year. The profit available for distribution should, in principle, be distributed equally over all shares or participations. The Deputy Minister of Finance has published a number of exceptions to the equal profit distribution obligation. The old decree already included an approval for investment funds with an umbrella structure (paraplufondsen) and preference shares (prioriteitsaandelen). The revised decree also includes an exemption for FIIs using separate share classes.
The equal profit distribution exemption is only applicable if the difference between the share classes used by the investment fund relates to:
- the amount of the management fee, addressing the possibility for an investment fund to also offer a share class to its investors without a distribution rebate (the zero rebate share class);
- the registration of share classes in different currencies;
- the costs associated with the way the shares are offered to the public.
To be eligible for the exemption, an FII must meet the following three conditions:
- the investment fund must report to what extent each separate share class has contributed to the reinvestment reserve (herbeleggingsreserve) and the rounding-off reserve (afrondingsreserve)
- Sections 3b and 4d of the Dividend Withholding Tax Act 1965 must be applied taking into account the abovementioned contributions to the reinvestment reserve;
- the shareholder requirements of the FII are not assessed at the level of each separate share class, but at the level of all share classes combined.
The revised decree will take effect as of March 1, 2014 and has retroactive effect to February 18, 2014.
3. Highlights of our FATCA seminar (March 21, 2014)
On Friday, March 21, 2014 KPMG Meijburg & Co organized The Netherlands FATCA and Common Reporting Standard Seminar with guest speakers Mr. Lu-Shen Qua and Mrs. Eline Goderie from the Netherlands Ministry of Finance.
The issues addressed included the Ministry of Finance’s view on the Netherlands IGA, the Foreign Financial Institution registration process, the Common Reporting Standard and the impact on multinational enterprises. If you have any questions about the seminar, FATCA or the Common Reporting Standard please contact Michèle van der Zande or other members from our FATCA team Jenny Tom, Jordi van der Struis and Mignon de Wilde.
4. Ruling on the valuation for tax purposes of a market maker’s positions in shares and options
The Supreme Court has rendered judgment on the question of the valuation of a market maker’s positions in shares and options and referred the case to the Court of Appeals in The Hague (Supreme Court March 21, 2014, no 12/02793).
Agreements about the valuation were made with the tax inspector in the past. The taxpayer believed that the inspector had insufficient reason for terminating these. The Supreme Court believes that the Court of Appeals rightly decided that the agreement could be terminated by the inspector.
Lower of cost or market value
Valuation at lower of cost or market is and remains permissible, also for listed securities and also for a market maker.
The Supreme Court noted that “when assessing the valuation system used by the taxpayer, the court of referral will also have to consider whether the taxpayer determines the cost prices it uses in a reliable and verifiable manner. Only then can a cost-based valuation system be in accordance with sound business practice”. What this exactly means for systems that are insufficiently reliable – valuation at market price? − is unclear.
The Supreme Court extends the principle of BNB 2008/26 (option ruling) to “all assets whose movement in value is directly related to the movement in share value”. In these cases, combined valuation is required. All instruments relating to the same underlying asset must now apparently be subject to combined valuation (the range of 80-125% from the “cocoa bean ruling” therefore appears to be no longer relevant here).
The criterion of BNB 2009/271 (cocoa bean ruling) continues to apply to assets that relate to different shares. This means that combined valuation only takes place if “the hedge is highly effective”. This applies “if it is to be expected on the balance sheet date that the movement in value of the relevant assets will most likely correlate within a range of 80 to 125 percent”. The Supreme Court thereby noted that the circumstance that the exchange risks have been almost entirely extinguished by means of delta hedging does not necessarily imply that there is a very effective hedge.
It is not clear whether the Supreme Court in this case assumes that the connection is, by definition, satisfied in the case of a correlation within a range of 80 to 125%, or that it is still necessary to separately examine whether a connection is objectively possible (the Philips share price performance appears to be unrelated to the Heineken call option price performance, for example).
Increase in the cost
The Supreme Court considers that, in this case, where risks are continuously hedged, the taxpayer who has realized a loss on securities, whose movement in value was connected with another class, must increase the cost of the other position still in its possession in the amount of the realized loss. This must then take place if the total cost of the group of securities − including the cost of the securities belonging to the group that are sold at a loss − is lower than the market value of the group’s remaining securities plus the proceeds realized from the sale of that group’s securities.
It seems that this increase in costs should only take place when the positions relate to the same fund.
5. Avoidance double bank levy
The Bank Tax Act took effect on October 1, 2012. Banks may face double taxation. A Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Bank Taxes was recently concluded with the United Kingdom. Other countries have let it be known that they are not interested in concluding such a treaty.
Banks may be faced with double taxation as a result of the fact that foreign-resident subsidiaries of Dutch groups or group members and/or Dutch resident branches of foreign banks are subject to Dutch bank tax, even though these companies or branches are also subject to a foreign bank tax. Because the bank tax is not a tax on income or capital gains, the existing treaties for the avoidance of double taxation do not provide for the avoidance of double taxation in respect of bank taxes.
The Netherlands has recently concluded a Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Bank Taxes with the United Kingdom. This treaty has retroactive effect to January 1, 2011. It was decided to have the avoidance of double bank taxes laid down in a treaty, because this avoidance requires a completely different methodology to that used for taxes on income and capital gains. The method used to avoid double bank taxes takes into account the fact that the risks run by the subsidiaries and branches are ultimately borne by the parent company or the head office. Under the above Convention, the country where the subsidiaries or branches are resident will therefore provide a credit for the avoidance of double bank taxes.
The Netherlands had intended to conclude treaties for the avoidance of double bank taxes with Germany, Belgium, Hungary, Slovakia and South Korea. However, Hungary and Slovakia have yet to respond to the invitation to conclude such a treaty, while Germany, Belgium and South Korea have let it be known that they are not interested. According to Germany, a solution to the problem of double bank taxes should be based on the Directive on bank restructuring.
Belgium does not see the need for such a treaty, because Belgium’s federal system and the efficiency exemption of EUR 20 billion in the Dutch bank tax means that double bank taxes between the Netherlands and Belgium will not arise.
A commonly used argument against drafting rules for the avoidance of double bank taxes is that what is being levied is not a bank tax, but rather a ‘resolution levy’. The collected revenue goes into a resolution fund and is not used for general expenditure, such as would be the case with a bank tax. This difference is the reason why some countries believe it would be better not to avoid double taxation.
The Decree on the Avoidance of Double Taxation does include rules on the avoidance of double bank taxes. However, the scope of these rules is limited, because they only apply if the other country levies a tax that is similar to the bank tax.
If you would like more information about the bank levy, please contact Niels Groothuizen.
6. VAT exemption for the management of special investment funds can be applied to services provided to pension funds that operate defined contribution schemes (“DC schemes”)
On March 13, 2014 the Court of Justice of the European Union (“CJEU”) rendered judgment in the ATP PensionService A/S (“ATP”) case (C-464/12).
The CJEU concluded that pension funds that operate DC schemes qualify as a special investment fund for which the management will be VAT exempt if:
(i) the pension fund is ultimately funded by the individuals to whom the retirement benefit will be paid;
(ii) the contributed funds are invested using risk spreading principles; and
(iii) the participants bear the investment risk.
The services relating to the operation of pension schemes qualify as management if the service provider establishes the rights of the participants through the opening of accounts in the pension scheme system and the crediting to such accounts of the contributions paid. This may also include accounting services and services related to payments and transfers to and from the relevant accounts.
Because pension funds that operate a DC scheme may qualify as a special investment fund, the VAT exemption for the asset management/management of special investment funds can be applied to asset management services provided to these pension funds. Given that the CJEU has applied a broad interpretation of the term ‘management’, the services relating to the operation of DC schemes would also appear to be covered by the exemption. Making the exemption available for services relating to the operation of DC schemes, will solve the VAT problem that Dutch pension funds will soon be faced with as a result of the fact that they will no longer be able to apply the cost sharing exemption to outsourced services relating to operation of their scheme.
In its judgment in the Wheels case (C-424/11) (see our Tax Alert of March 7, 2013), the CJEU had already concluded that pension funds that operate a defined benefit scheme (“DB scheme”) cannot be regarded as a special investment fund. However, it is conceivable that the characteristics of some DB schemes are such that pension funds operating such schemes may also meet the requirements stipulated by the CJEU to qualify as a special investment fund.
What are your options?
Pension funds operating DC schemes appear to meet the conditions stipulated by the CJEU. If so, Consequently, a VAT exemption applies to their asset management services and services relating to the operation of the scheme. As the exemption appears to cover a wide range of services, pension funds operating DC schemes should check to see to which services the exemption applies and discuss the VAT treatment of services provided to them with their suppliers.
Pension funds operating DB schemes or CDC schemes should also check to what extent they meet the conditions set by the CJEU to qualify as a special investment fund. Pension funds meeting these conditions also appear to be able to benefit from the VAT exemption for any asset management services and services relating to the operation of the scheme provided to them.
If you would like more information about VAT, please contact Gert Jan van Norden.
7. The Supreme Court: road assistance services fall within the scope of Insurance Premium Tax
On February 14, 2014 the Supreme Court ruled (case nr. 12/05800) that the activities of a legal entity offering road assistance services in the event of vehicle breakdown for a fixed annual fee constitute an insurance contract, on which insurance premium tax (“IPT”) is payable. The current IPT rate in the Netherlands is 21%.
The Supreme Court did not uphold the judgment rendered by the Court of Appeals. The Court of Appeals had ruled that the “reimbursement of financial loss” was not the main element in the road assistance contract, and therefore the contract did not qualify as an insurance contract, which also meant that no IPT was payable.
Based on a different interpretation of the same Sections on insurance in the Dutch Civil Code, the Supreme Court concluded that the road assistance contract does qualify as an insurance contract within the meaning of the Dutch Civil Code. Consequently, the legal entity performing these services on a more than incidental basis and in the course of its regular business activities, is to be regarded as an insurer as referred to in the Dutch Legal Transactions Taxation Act (Wet op belastingen van rechtsverkeer). The legal entity must therefore pay IPT on the fixed annual fees for its road assistance services. This case also highlighted that it is irrelevant whether the legal entity is regarded as an insurer within the meaning of the Financial Supervision Act.
The Court of Justice of the European Court had previously rendered judgment on the question whether road assistance services in the event of vehicle breakdown for a fixed annual fee constitutes an insurance contract (CJEU December 7, 2006 C-13/06) . These proceedings were initiated by the European Commission as it disputed the Hellenic Republic´s charging of VAT on these services. The EC was of the opinion that, as the services qualify as insurance, the service should be treated as VAT exempt. This case highlighted the fact that the service provided by the insurer in the event of accident/loss may consist of a monetary payment, but it may also take the form of the provision of assistance in kind. The CJEU ruled that these services are to be treated as VAT exempt insurance services.
Whereas the Court of Appeals had created a tax leakage by ruling that the services were not subject to IPT, and the CJEU had ruled that the services were to be treated as VAT exempt, it is now clear from the Supreme Court judgment that these services are subject to Dutch IPT.