Tax Alert: Update on VAT case law

Application of VAT exemption for the management of qualifying “special investment funds” in respect of pension funds

On 5 September 2024, the European Court of Justice (ECJ) issued a ruling in various cases (C-639/22, C-640/22, C-641/22, C-642/22, C-643/22 and C-644/22) regarding the scope and application of one of the VAT exemptions. In dispute is whether special occupational pension funds can apply the VAT exemption for the management of special investment funds under Article 11(1)(i)(3) of the Dutch VAT Act 1968 (the VAT Act) and provided for in Article 135(1)(g) of the VAT Directive. In principle, it is up to Member States to define ‘special investment funds’. However, the notion of ‘special investment fund’ to be defined by Member States is superposed to some extent in EU law by the UCITS Directive.  

The Netherlands has not yet defined the occupational pension funds at issue as special investment funds and the Dutch tax authorities therefore believe that management services provided for them are subject to VAT. According to the guidance provided by the Dutch State Secretary of Finance on 19 September 2014, an ‘individual defined contribution pension scheme’ (in the third pillar of the national pension system) constitutes a ‘special investment fund’, the management of which is exempt from VAT.  The purpose of the individual defined contribution pension scheme in the third pillar seems to be to enable employees voluntarily to top up other pension benefits. The aim of compulsory participation in an occupational pension fund (second pillar), on the other hand, is mandatory coverage of all employees going beyond ensuring basic pension provision (as provided for in the first pillar).

The District Court of Gelderland, the Netherlands, requested for a preliminary ruling with the ECJ in six proceedings on the scope of “special investment funds”, more specifically whether the special occupational pension funds can qualify as such and, if not, whether the principle of neutrality must be interpreted as meaning that it is also necessary to make a comparison with other funds (not being UCITS) that are regarded as special investment funds by Member States. For the Netherlands specifically, the latter relates to the question whether the VAT exemption granted to certain pension funds (in the third pillar of the national pension system) must also be extended to other pension funds (in the second pillar in this case).

The ECJ has held that one of the characteristics required for an entity to be considered comparable to a UCITS and therefore to qualify as a “special investment fund” is that the participants are entitled to the profits or bear the risk linked to the management of the fund. The ECJ rules that Article 135(1)(g) of the VAT Directive must be interpreted  such that a pension fund may be deemed to bear the investment risk only where that amount depends primarily on the performance of those investments. The number of years during which a member’s pension entitlement has accrued, or the fact that the accrual of pension entitlements was interrupted at a certain point in time as far as a pension fund was concerned, are irrelevant in making that assessment. The fact that the risk is borne individually or collectively, in the event of bankruptcy, among other things, or that an employer acted as a guarantor during a certain period of time for the targeted pension accrual, are relevant factors, without, in itself, being decisive per se. In light of the principle of fiscal neutrality, the exemption at hand should furthermore be interpreted as meaning that, in order to determine whether a pension fund that is not a UCITS may benefit from the exemption provided for under that provision, it is necessary not only to carry out a comparison with such an undertaking, but also to assess whether, in light of the legal and financial situation of the member in relation to the pension fund, that pension fund is comparable to other funds which, without being a UCITS, are regarded by the Member State concerned as “special investment funds” for the purposes of that provision. In practice, the ECJ ruling could potentially expand the scope of the VAT exemption for certain qualifying pension funds. However, the District Court of Gelderland must now assess whether the applying pension funds meet the requirements determined by the ECJ.

No refund of VAT unduly invoiced and paid under certain circumstances

On 5 September 2024, the ECJ issued a VAT judgment (C-83/23)  on the refund mechanism if VAT is unduly invoiced and paid in the event of a supplier insolvency. 

H GmbH, the applicant in the procedure, is a successor in title of a limited partnership established in Germany (KG), which conducted, among other things, sale-and-leaseback transactions for E GmbH in the years 2007 to 2012. Under this arrangement, E GmbH purchased boats from a company established in Italy. According to the parties, the case involved an intra-community supply and therefore no VAT was invoiced. Following that purchase, E GmbH and KG entered into a sale-and-leaseback agreement providing for (i) the sale of the boat to KG at the net purchase price plus German VAT; and (ii) an agreement relating to a leasing contract transferring the right to use that boat to E GmbH. E GmbH sent KG an invoice that expressly stated German VAT, entered that VAT in its tax returns, and paid the VAT to the relevant German tax office. In its VAT returns, KG deducted, in respect of the input VAT paid, the VAT entered on that invoice. 

During a German VAT inspection of E GmbH, it became evident that at the time of the sale the boats were in Italy (and not in Germany), as a result of which Italian VAT should have been paid rather than German VAT. E GmbH informed KG that it had erroneously invoiced German VAT and informed KG that the invoices would be corrected. Following a VAT inspection carried out at KG’s premises, the tax inspector stated that the VAT invoiced by E GmbH to KG was due, but that it could not be deducted by KG as input VAT. KG paid that VAT to the German tax authorities.

In 2014, E GmbH became subject to insolvency proceedings. The court-appointed insolvency administrator of E GmbH corrected the invoices and submitted a request for correction to the German tax authorities. The German tax authorities granted the request and refunded the corresponding VAT to E GmbH, while informing the insolvency administrator that it was required to subject the transactions to VAT in Italy. KG also requested a VAT refund relating to the erroneously invoiced VAT on equitable grounds from the German tax authorities. The German tax authorities did not honour this request. The Finanzgericht Düsseldorf (Finance Court, Düsseldorf, Germany) dismissed the action brought by H GmbH on the ground that the German tax authorities were not required to refund VAT that had been unduly invoiced, since that VAT has already been repaid to E GmbH. The Finance Court also concluded that H GmbH had no civil right to a refund of that VAT from E GmbH, but merely a right to be issued with an invoice containing Italian VAT. 

The Bundesfinanzgericht (Federal Fiscal Court) decided to request a preliminary ruling with  the ECJ, which in essence amounted to the question whether, in light of the principles of effectiveness and VAT neutrality, a recipient of a service may directly request from the tax authorities of its country of residence a refund of VAT that it paid to the supplier of that service – which had erroneously invoiced and paid the national VAT of that Member State (instead of invoicing and paying the VAT legally due in another Member State) – where those tax authorities have already refunded the VAT to the supplier of the service, which has gone into liquidation. In this regard, the Bundesfinanzgericht refers to earlier case law of the ECJ (Reemtsma Cigarettenfabriken, C-35/05) whereby the ECJ has ruled that if reimbursement of VAT becomes impossible or excessively difficult, in particular in case of insolvency of the supplier, among others, the principle of neutrality may require that the recipient of the service should be able to request the reimbursement of VAT directly from the relevant tax authorities. 

In the case at hand, the ECJ ruled that the aforementioned case law could not be applied as the German tax authorities had already repaid the VAT unduly paid by KG to E GmbH. The ECJ in essence ruled that the recipient of a service may not directly request a VAT refund from the local tax authorities in a situation in which the supplier of the service erroneously invoiced the national VAT (i.e. German VAT) rather than the VAT legally due (i.e. Italian VAT) if those tax authorities have already refunded the VAT to the supplier of the service, even if this supplier has gone into liquidation. Other relevant factors leading to the ruling of the ECJ were that the recipient of the service had not used any possibility of retrieving the VAT from the supplier (e.g. by bringing a civil action against the court-appointed insolvency administrator responsible for the liquidation of the supplier, or by registering itself for VAT purposes in the Member State in which the VAT was due for the supplier to be able to submit a correct invoice and for the recipient to deduct the input VAT paid in that Member State). The fact that E GmbH was insolvent, potentially resulting in not being able to bring a successful action against the court-appointed insolvency administrator, was considered irrelevant. The ECJ therefore again emphasised that a direct request of a VAT refund to the tax authorities should be considered an exception which can be applied only under specific circumstances.

Although the above judgment may not be unexpected in light of existing case law, it should be taken into account that the local tax authorities are, in principle, not required to cooperate with a direct VAT refund request if the VAT has been unduly invoiced and paid (even in the event of an insolvent supplier) and if the VAT has already been refunded to the supplier of the services. The recipient of the services should have tried to retrieve the VAT in another way (e.g. civil law action). It is recommended that in practice parties immediately try to correct and solve the VAT position together by making clear arrangements.

Advocate General conclusion on criteria to form a VAT fiscal unity; concept of ‘close financial links’

On 26 July 2024, Advocate General (A-G) Ettema of the Dutch Supreme Court published her conclusion on the requirement of being financially linked to form a fiscal unity for VAT purposes. Dutch VAT-able persons that are closely linked economically, financially and organisationally form a VAT fiscal unity for VAT purposes by operation of law in the Netherlands. A VAT fiscal unity is regarded as a single entrepreneur for VAT purposes and, as such, no VAT needs to be charged on intragroup transactions. Also, in principle only one VAT return needs to be filed, which results in a lower administrative burden. 

In light of case law of the Dutch Supreme Court, VAT-able persons are currently deemed close financially linked if more than 50% of their shares, including voting shares, are directly or indirectly controlled by the same person. A-G Ettema considers this view no longer in line with EU law and believes that the current Dutch requirement is too stringent. Based on an ECJ judgment in 2022 [1], A-G Ettema considers that in order to form a VAT fiscal unity, more specifically to meet the financially linked criterium, it is not necessary to have a majority of shares (i.e. 50% or more) including a majority of the voting shares, but that it should be determined whether such a party is able to impose its will on the other entities. It is now up to the Dutch Supreme Court to decide if it should revisit previous case law on this topic. However, if the Dutch Supreme Court follows the advice of A-G Ettema, certain VAT fiscal unities may dissolve and other VAT fiscal unities may be formed by operation of law, which is relevant, among other things, in relation to the joint and several liability associated with a VAT fiscal unity. We will update you as soon as any relevant next steps or developments take place.

[1] 1 December 2022, ECLI:EU:C:2022:943 (Norddeutsche Gesellschaft für Diakonie)