Netherlands: Opinion Of The Advocate General At The Court Of Justice Of The European Union Published In The Dutch VAT Pension Fund Cases

Today, the opinion of the Advocate General ("AG") at the Court of Justice of the European Union ("CJEU") has been released in the six consolidated Dutch pension fund cases. In line with the position of the Dutch Tax Authorities, the AG expects that the pension funds in the pending cases are generally not sufficiently comparable to Undertakings for Collective Investment in Transferable Securities ("UCITS") and therefore do not qualify for the VAT exemption for asset management.

Background

In 2016, the Dutch Supreme Court ruled that services provided to a Dutch pension fund executing a conditional defined benefit pension scheme do not fall under the VAT exemption for the management of a special investment fund. In this judgment, the Supreme Court departed from the opinion of its AG, who believed that the exemption should apply.

The main reason for the Dutch Supreme Court was that the Dutch pension fund was not sufficiently comparable with a regular investment fund such as UCITS, due to the insufficient correlation between the investment results and the pension (entitlement) of the participants. As such, the participants bear insufficient investment risk according to the Dutch Supreme Court and the pension fund did not qualify as a special investment fund.

Multiple Dutch pension funds are of the view that the Dutch Supreme Court applied an incorrect interpretation of the conditions of the exemption that does not follow from the CJEU case law. Therefore, numerous court procedures were started in this respect.

Until the six cases referred to the CJEU by Gelderland District Court, all Dutch courts ruled in favor of the Dutch tax authorities with a reference to the 2016 Dutch Supreme Court ruling.

Questions referred

The questions referred to the CJEU mainly relate around whether the participants in the pension schemes bear the investment risk, which is a condition to qualify for the asset management VAT exemption. As mentioned above, the Dutch Supreme Court gave an own interpretation and concluded that although there was an investment risk for the participants this was insufficient for the pension fund to be comparable to UCITS. Therefore, in the referred questions to the CJEU multiple elements of Dutch pension schemes have been brought forward to get clarity to which extend these are relevant to conclude whether or not the participants bear the investment risk.

Examples of the elements mentioned in the referred cases are (i) whether the participants should bear an individual investment risk or if it is also possible to bear the risk as collective (typical for Dutch pension schemes), (ii) whether it is relevant that the height of the pension also depends on other factors (next to the results of the investments) such as number of working years, salary level and the actuarial interest rate and (iii) whether a (temporary) guarantee of the employer to hit the targeted pension accrual is of relevance in this respect.

Next to the above, there is also a question around the comparability test. More specific it is requested whether this should not only be made with a UCITS but also other local funds that are not UCITS but qualify as a special investment fund.

Opinion AG

In the opinion, the AG addresses the various conditions that must be met to qualify for the asset management exemption. In this context, the AG first considers that a pension fund is not open to the public, therefore a pension fund cannot be comparable to UCITS. Consequently, there can also be no competition. Another point, according to the AG, which likely makes pension funds not comparable with UCITS, is that there is no comparable repurchase or redemption obligation.

Furthermore, the AG addresses the issue primarily raised in the referred questions, namely the investment risk borne by the participants. In this context, the AG appears to apply a similar test to that of the Dutch Supreme Court in 2016. According to the AG, it is crucial that the pension under the pension scheme primarily depends on investment results. In other cases, participants do not bear a comparable investment risk as investors through UCITS. According to the AG, most pension schemes in the pending cases appear to be pension schemes where there is no investment risk comparable to UCITS.

Finally, the AG addresses the comparability test. In this context, it is indicated that the VAT directive does not prohibit a EU Member State from making a distinction between differently structured pillars (mandatory and voluntary pension accumulation) of its pension system, and on the one hand more specifically between guaranteed pension commitments and on the other hand pension commitments dependent on the development of investment returns.

A&M Says

The AG's opinion is a setback for the pension sector, particularly because, according to the AG, there does not appear to be sufficient comparability with a UCITS, not only due to the limited investment risk but also on other grounds. Interestingly, this seems contradictory in light of the previous case law of the CJEU regarding pension funds, which primarily focused on investment risk.

The AG's opinion is merely an opinion that does not necessarily have to be followed by the CJEU. Therefore, there is still a chance that the CJEU may reach a different outcome, as we have seen in the case of the Dutch Supreme Court in 2016. Nevertheless, we recommend pension funds to consider a negative outcome and explore alternative ways to potentially reduce VAT costs.

Originally Published by 14 March 2024

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