The European Court of Justice (ECJ) has ruled that Dutch defined benefit (DB) funds do not owe value-added tax (VAT) on asset management if pension benefits depend “primarily” on returns, However, a Dutch court now needs to assess whether the funds in question meet this criterion.
Dutch DB pension funds are in a long-running dispute with the Dutch state about whether they should pay VAT on services provided by their asset managers.
The funds believe they do not have to pay VAT because the participants bear the investment risk, as is the case with investment funds, which are exempt from paying VAT.
In this case, which was started by the sector funds for grocers Levensmiddelen, agricultural sector scheme BPL Pensioen, the professional fund for physiotherapists and insurance firm Achmea, the ECJ ruled that pension funds do not have to pay VAT if pension benefits are ‘primarily’ dependent on the returns achieved.
According to Gert-Jan van Norden, a tax adviser at KPMG, the ruling is “a positive interim outcome.” He represents Achmea and bpf Levensmiddelen in the case.
But Edwin van Kasteren of PwC, the lawyer for BPL and the physiotherapists’ fund, was surprised by the ruling. “We had hoped for a clearer outcome,” he said. “Now the question has been reverted to the lower Dutch court.”
The Dutch pension federation also said in a statement on its website that the ruling brought up “new elements that ask for further study, and – as it seems – a judgement on the pension fund level”.
Advocate General ignored
“On the positive side, though, it does not impose new requirements, as in the Advocate General’s opinion,” noted Van Kasteren. Namely, in her advice to the court in March, the Advocate General had added new criteria that could be imposed on a pension fund to be comparable to an investment fund.
For example, it should be possible for a participant to withdraw their money from a pension fund, as is the case with an investment fund. “But that advice has been ignored,” said Van Kasteren, who has been involved in VAT litigation for 10 years.
Back at the Dutch court, both lawyers expect to stand a good chance.
“We can prove for our clients that the pension benefits depend mainly on the return made on the investments,’ said Van Norden.
“The court does mention other things like length of service and salary that affect the benefit. But those are factors that affect the deposit. That is similar to putting in a lot or a little money into a mutual fund,” he added.
According to van Kasteren, around 70% of pension benefits consist of returns.
“This is partly due to the interest-on-interest effect. Moreover, a certain return is assumed when setting the contribution rate. If the return is lower, benefits have to be cut. In that sense, the risk lies squarely with the participant,” he said.
Both advisers expect the lower Dutch court to issue a new ruling next spring after the opposing parties have been heard again.
This article was first published on Pensioen Pro, IPE’s Dutch sister publication. It was translated and adapted for IPE by Tjibbe Hoekstra
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