Dear FS professional,
In this spring edition of our FS Tax Newsletter you will find an update of several VAT related court cases, such as the hearing on the VAT group X case which was held at the Court of Justice of the European Union, the issued Advocate General’s opinion in the PPG Holdings case, Dutch policy on the Skandia case and pending VAT related cases at the Court of Justice of the European Union.
We have also included a summary of the EU proposal on compulsory exchange of information on cross-border tax rulings, which also affects the FS industry. Lastly, we included a link to the playbacks of the KPMG hosted WebEx sessions that focused on BEPS and the latest developments for financial services.
Please save the date in your calendar for the following events/seminars:
- A seminar for pension funds and administrators of pension funds will take place next Wednesday (April 8, 2015) at our office in Amstelveen
- On April 15, 2015 our annual FS VAT seminar will take place, also at our office in Amstelveen
- Our annual FS Insurance seminar will take place on Thursday May 28, 2015
- Several training courses “Tax Knowledge Institute”
If you are interested in attending one of the above seminars, please send Olga Tichelman an email.
Partner, Financial Services Tax Group
Table of Contents
- 1. CJEU hearing on the management of real estate funds
- 2. Opinion issued in the PPG Holding BV case
- 3. Dutch policy on the Skandia case
- 4. Pending cases at the Court of Justice of the European Union
- 5. EU proposes compulsory exchange of information on cross-border tax rulings
- 6. BEPS – latest developments for Financial Services WebEx sessions (playbacks)
1. CJEU hearing on the management of real estate funds
On March 4, 2015, the hearing on the VAT group X case was held at the Court of Justice of the European Union. This case concerns the VAT treatment of the management of real estate funds, but is also relevant for other investment funds.
The taxpayer concluded management agreements with three companies that invest in real estate. The taxpayer’s activities include the exploitation of the real estate (property management).
Pursuant to VAT legislation, the management of special investment funds is exempt from VAT. The Supreme Court requested a preliminary ruling from the Court of Justice of the European Union (“CJEU”) on whether investment companies that invest in real estate qualify as a special investment fund. The Supreme Court also wanted to know whether the actual exploitation of the real estate is covered by the term ‘management’ within the meaning of this exemption.
Position of parties of interest
Based on the three conditions from the CJEU’s ATP case, the taxpayer argues that companies investing in real estate qualify as a special investment fund. The taxpayer further believes that property management is specific and essential to investment in real estate. The taxpayer therefore considered that the actual exploitation of real estate qualifies as ‘management’ within the meaning of the exemption.
We find it surprising that the Dutch Ministry of Finance indicated that it has no preference for a narrow or a broad interpretation of the term ‘special investment fund’. With respect to the term ‘management’, the Netherlands advocates a strict interpretation, with the actual exploitation of real estate not qualifying as management within the meaning of the exemption.
Both the United Kingdom and Sweden consider that a narrow interpretation should be given to the exemption and that only the management of investment funds that invest in securities or similar products can be included under the exemption. They also believe that the risk spreading condition from the ATP case is not satisfied because investments are only made in the real estate sector.
The European Commission answered the two questions raised by the Supreme Court in the affirmative. It also addressed the interpretation of the term ‘management’. The Member States already have some discretion in determining the scope of the term ‘special investment fund’. During the hearing, the European Commission stated that in its opinion the Member States have this freedom with regard to the term ‘management’ as well.
There are several reasons why this case is relevant to the real estate funds practice. For example, it is unclear whether the Dutch practice of allowing real estate funds and other investment funds to make use of the VAT exemption can be maintained. If the term ‘management’ also covers property management of real estate funds, then it could be the case that more activities would fall under the exemption if it involves other types of special investment funds. It would be a good idea to examine the impact of this case.
The Opinion of Advocate General Kokott in this case will be published on May 20, 2015. If you have any questions about this particular issue, please contact Gert-Jan van Norden (Partner Indirect Tax Financial Services Group)
2. Opinion issued in the PPG Holding BV case
The Advocate General (“AG”) at the Supreme Court recently issued her Opinion in the PPG Holding BV (“PPG”) case in which she concluded that PPG could deduct the VAT on the expenses related to its own pension fund.
PPG offers a defined benefit pension plan to its employees, whereby pension assets are placed in a separate pension fund. PPG engages various service providers to administer and manage the pensions and deducts the VAT charged on the invoiced expenses.
The dispute centered on whether PPG should have deducted this VAT, and forms the continuation of a preliminary ruling from the CJEU. The AG at the Supreme Court, Ms. M.E. van Hilten, recently concluded that PPG can deduct this VAT. A judgment by the Supreme Court is now pending.
Opinion issued by Advocate General to the Supreme Court
AG Van Hilten is thus following the position taken by PPG, i.e. that the expenses PPG incurs with regard to its pension fund are general expenses. On this point, the AG also confirmed the judgment by the Court of Appeals Arnhem-Leeuwarden. The Court concluded that it was plausible that general expenses were involved because all the expenses incurred, which related to the employees, are part of the cost of the goods and services supplied by PPG and these costs are directly and immediately linked to the economic activities performed by PPG.
After the preliminary ruling from the CJEU, the Dutch tax authorities argued that VAT was payable by PPG because PPG had supplied the engaged services to its pension fund for a payment in kind. This position does not directly relate to the disputed entitlement of PPG to deduct VAT. AG Van Hilten therefore concluded that the Dutch tax authorities had presented this argument too late in the proceedings. In her opinion, in the interests of due process this argument therefore does not have to be dealt with further.
The AG also concluded that PPG is not subject to a deduction limitation by virtue of the VAT Deduction Exclusion Decree (Besluit uitsluiting aftrek omzetbelasting 1968; “BUA”). According to the AG, the PPG pension fund is not receiving a gift or promotional business gift from PPG. She also believes that this does not involve a staff benefit, because the business expenses involved do not serve any private purpose.
What are your options?
This Opinion is especially relevant to situations where an employer bears or is considering bearing certain expenses related to a pension fund’s pension plan. If you have any questions about this particular issue, please contact Gert-Jan van Norden (Partner Indirect Tax Financial Services Group).
3. Dutch policy on the Skandia case
The Dutch Ministry of Finance has informally announced its position on the application of the Skandia judgment. According to the Ministry, the Skandia judgment does not apply in the Netherlands.
In the December 2014 FS Tax Newsletter we informed you that it had been announced that the Dutch Ministry of Finance and the Dutch tax authorities had put the internal policy regarding the Skandia case on hold for the time being. In this newsletter, we would like to inform you that on February 10, 2015, the Dutch Ministry of Finance informally announced the position taken by the Netherlands on the application of the Skandia judgment.
According to the Ministry of Finance, the Skandia judgment does not apply in the Netherlands. This is the case for both a Dutch head office that is part of a Dutch VAT group and a Dutch fixed establishment that is part of a Dutch VAT group.
Position Ministry of Finance
The reason the Ministry of Finance has decided not to apply the Skandia judgment is because the VAT group regime in the Netherlands is different to the VAT group regime in Sweden. The position taken by the Ministry of Finance effectively means that the Dutch practice in place before the Skandia judgment will continue unchanged. For more detailed information on the Dutch Ministry of Finance’s position we refer to our earlier publication.
Services between a head office and a fixed establishment will remain outside the scope of Dutch VAT, even if the Dutch head office/fixed establishment is part of the Dutch VAT group. This is in line with the Supreme Court interpretation of the Dutch VAT group regime. We concur with the path the Netherlands has chosen in this, both from a VAT technical and a practical perspective.
It continues to be important to examine how other Member States treat the services between a head office and a fixed establishment.
VAT position other EU Member States
On February 10, 2015 the UK tax authorities (HMRC) published guidance on the application of the Skandia judgment in the United Kingdom. Its position is largely the same as that of the Netherlands. However, unlike the Netherlands, HMRC takes account of the scope of the foreign VAT group. The Irish Revenue announced that it will consult with industry, tax advisors and other interested parties. Until this consultation is completed and new guidance is published, Irish VAT entrepreneurs may continue to act on the basis of the existing practice. Other Member States have not yet published any formal position. The European Commission and the Member States are currently discussing the application of the Skandia judgment. The Commission appears to prefer a broad interpretation of the judgment. We will, of course, keep you informed of the outcome of this discussion.
If you would like to discuss the implications of the Skandia judgment for the Netherlands and other Member States, please contact Gert-Jan van Norden (Partner Indirect Tax Financial Services Group) or Irene Reiniers (Senior Manager Indirect Tax Financial Services Group).
4. Pending cases at the Court of Justice of the European Union
Several preliminary rulings are addressed to the European Court of Justice with respect to VAT and financial services. It concerns the VAT treatment of debit and credit card handling services, the provision of warranties and claim handling services.
Bookit Ltd (no. C-607/14) – debit and credit card handling services
Bookit is involved in the processing of credit and debit card payments in relation to the purchase of cinema tickets. It charges an additional fee to purchasers of such tickets for its payment handling services. First, Bookit sends various data to the merchant acquirer via a payment gateway. This is required to obtain authorization for the card payment. Second, Bookit provides information to the merchant acquirer for the payment transaction.
The UK Tax and Chancery Chamber would like to know whether the exemption concerning payments and transfers applies to such services that result in a transfer of funds but that do not include the task of making a debit to one account and a corresponding credit to another account. It would also like to know whether the entitlement to the exemption depends on whether the service provider itself obtains authorization codes directly from the cardholder’s bank, or alternatively obtains those codes via its merchant acquirer bank.
The questions referred to could provide further insight into the definition of transactions concerning payment and transfers, and the scope of transactions entailing legal and financial changes. This is relevant for all parties involved in payment-related services. If you would like to receive more information about this case, please contact Gert-Jan van Norden (Partner Indirect Tax Financial Services Group) or Karim Hommen (Senior Manager Indirect Tax Financial Services Group).
Mapfre Asistencia and Mapfre Warranty SpA (no. C-584/13) – Provision of warranties
On February 4, 2015, the Advocate General M. Szpunar at the CJEU issued his Opinion in the case Mapfre Asistencia and Mapfre Warranty SpA.
Mapfre Warranty SpA (“Mapfre W”) provides a warranty for the proper functioning of certain components in used cars. Car dealers offer this warranty to their customers when buying a used car. If a defect (covered by this warranty) occurs, the buyer of the car can report to a garage (which is not necessarily the garage of the used car dealer). Following the approval of Mapre W, the garage repairs the car and the repair costs are paid by Mapfre W. Mapfre W receives a fixed fee from the used car dealers for this service, for which it covered itself against possible losses by taking out insurance with Mapfre Asistencia.
Although the facts in this case do not seem to be entirely clear, the AG believes that this case does not involve a warranty by the used car dealer, and that Mapfre W’s services are separate from the agreement for the sale of the car. Therefore, in the view of the AG, Mapfre W performs a VAT-exempt insurance service.
This Opinion is relevant to situations where a warranty is provided in relation to the purchase of certain goods and services. If you have any questions about this particular issue, please contact Marije Harthoorn (Director Indirect Tax Financial Services Group). A further explanation of the case can be found here.
BRE Ubezpieczenia (no. C-40/15) – claim handling services
BRE Ubezpieczenia (‘BRE’) renders claim handling services in relation to insured incidents. It supplies these services on behalf of the insurer on the basis of an agreement, concluded with this insurer.
BRE takes the view that its services are VAT exempt, because these are specific to and essential for insurance services. However, BRE does not conclude insurance agreements with the insured party, while this seems to be an essential aspect of the VAT exemption for insurance transactions. BRE also does not seem to qualify as an insurance broker or insurance agent, which also appears to be an important aspect to apply the VAT exemption for activities relating to insurance negotiation.
The referring Polish Court would like to know whether the VAT exemption for insurance activities and insurance negotiation can be applied to claim handling services that are performed by a third party on behalf of the insurer, when no legal relationship exists between this third party and the insured party.
This case could provide further insight into the VAT exemption for insurance transactions and insurance negotiation. If you would like to receive any further information, please contact Marije Harthoorn (Director Indirect Tax Financial Services Group).
5. EU proposes compulsory exchange of information on cross-border tax rulings
On March 18, 2015, the European Commission released draft legislation regarding automatic exchange of information on cross-border tax rulings as part of a package of measures to combat tax avoidance and harmful tax competition. If approved by Member States, the new automatic exchange would apply from 2016. Other measures proposed in the package include the repeal of the EU Savings Directive and a possible extension of country-by-country reporting by companies in all sectors.
The proposals on tax rulings take the form of an amendment to the current EU Directive on Administrative Co-operation (DAC) in the field of direct taxation (2011/16/EU). Until 2015 the DAC only required spontaneous exchange of information and, although this could include tax rulings in practice, it was not considered an effective mechanism mainly because of its limited and uncertain scope. In practice very little information on tax rulings has been shared. As from 2015 (and again from 2016) the DAC has been extended to include automatic exchange of information on certain types of income, but tax rulings are not specifically covered. This omission was addressed in the Commission’s 2015 Work Programme and has now resulted in the current proposals.
Scope of new rules
The proposals would require Member States to exchange information on cross-border tax rulings, including APA’s automatically with each other as well as with the Commission. This would apply to all rulings granted over the past 10 years, as long as they are still in force.
The information must be exchanged on a quarterly basis. The minimum requirements for information to be covered include the identification of the taxpayer and the group to which it belongs, the content of the ruling/APA, the criteria used for the transfer price in the case of an APA, and identification of Member States and other taxpayers possibly affected by the ruling/APA. Member States can, in principle, request further information including the full text of the ruling in question.
The new rules are broadly drafted to include all arrangements entered into on behalf of a Member State regarding the interpretation or application of its tax laws that are granted ahead of the transactions concerned. Domestic tax rulings and rulings concerning individuals will not be covered.
Under the current proposals it will not be possible for a Member State to refuse to exchange information on tax rulings on grounds of commercial secrets. However, the Commission considers such interests would be adequately protected under EU law.
Interaction with other initiatives
The Commission’s proposals on tax rulings should be seen in the context of the OECD’s similar proposals in BEPS action 5, which advocates “compulsory spontaneous exchange” of tax rulings. However, not only are the latter non-legally binding but they are also more restricted in scope.
The proposed exchange of information on tax rulings should be distinguished from the recent investigations by the Commission into tax rulings of certain multinationals in the context of state aid. Although the information on rulings will also be exchanged with the Commission, this does not mean that a Member State no longer has to notify the Commission in advance of state aid.
The reason for the proposed repeal of the Savings Directive is that its provisions have effectively been incorporated into the 2016 amendments to the DAC. It should also be noted that the country-by-country reporting being considered under the new proposals would involve public disclosure, in line with the EU rules for banks and the extractive industry, rather than that envisaged under the OECD’s BEPS action 13.
If approved by all Member States, the proposals must be implemented into their domestic legislation by the end of 2015, and be applied from January 1, 2016. The Commission is expected to publish an action plan on corporate taxation before the summer of 2015, which will address the Common Consolidated Corporate Tax Base (CCCTB) initiative and ideas for integrating OECD/BEPS proposals into EU law.
This package of proposals forms part of the various international initiatives aimed at aggressive tax planning and transparency and should also be seen in light of the public debate on tax morality. Although the Commission has indicated that the information exchanged would be adequately protected, companies should be aware that they are also looking into the question of public disclosure. The timetable is ambitious and it may be questioned whether the infrastructure will be in place on time to effectuate the proposals in all Member States.
If you have any questions about this particular issue, please contact Jeannette van der Vegt (Senior tax manager tax litigation practice)
6. BEPS – latest developments for Financial Services WebEx sessions (playbacks)
KPMG hosted a series of WebEx sessions which focused on BEPS and the latest developments for financial services. Our intention has been to provide some practical insights into the recently released discussion papers and consultation sessions concerning the items on the BEPS Action Plan that are having a particular impact on financial services.
The sessions made clear that the BEPS Action Plan is moving fast, and that there are a number of action points that the financial services industry will need to consider including risk and reward to capital, the threshold for re-characterizations, the relationship between the arm’s length principle and special measures and practical guidance on splitting profits and losses!
A key question is to what extent transactions can be carved out from the debate on risk and reward to capital and re-characterizations on the basis that they operate through regulated entities. In addition, Country by Country Reporting presents a number of practical challenges concerning scoping, interpretation, data gathering and reporting. Communication strategy with the tax authorities is key to managing the risks in respect of this new data, and transfer pricing documentation is an important part of this. We touched on all of these points during the session.
The recording and materials for all three sessions – Banking, Insurance and Investment Management can be accessed here.