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Headlines

Belgium Coming soon: anti-abuse rule in Belgian VAT code

Denmark Partial right of VAT recovery for holding company

Europe Where do we stand after Andersen?

Europe/Netherlands Interpretation ‘management of special investment funds’ - Preliminary questions referred by Dutch Supreme Court

GermanyFurther prolongation of transitional period for VAT exemption of financial sub-intermediary services by German Federal Ministry of Finance

GermanyNew amendment rules regarding input VAT -Decree of the German Federal Ministry of Finance of 6 December 2005

Ireland Irish Revenue's interpretation of Kretztechnik

IrelandIrish Revenue issue clarification regarding the VAT treatment of Canteens

Netherlands Decree on commencement date fiscal unity for VAT issued

United KingdomPre Budget announcements regarding response judgement Andersen

December 2005, issue 2005/16

EditorialWe are pleased to present you with the PricewatehouseCoopers Financial Services VAT Alert containing the latest VAT news in the sector. This Alert is intended as an easy tool for you to keep track of the ever changing VAT in the Financial Services Sector.

If you have any queries or need assistance, please contact us.

Frans Oomen (frans.oomen@nl.pwc.com)Wider Europe VAT Leader Financial Services

BelgiumComing soon: anti-abuse rule in Belgian VAT code

In a recent proposal of law, the government intends to introduce an anti-abuse rule in the VAT code. The wording is similar to the existing article for corporate tax. The aim is to tackle all artificial legal structures which have been set up to avoid VAT or to increase VAT deduction.

In order for the rule to be applicable, the following conditions have to be fulfilled: There must be existence of a legal deed or

subsequent legal deeds that originate one transaction;

These legal deed(s) can be re-qualified taking into account the factual situation;

The re-qualification can only be done in case the VAT authorities are able to prove on beforehand that the legal setup has been construed with the sole aim to avoid the tax.

An example within the explanatory note of the proposal is the refusal to allow a creation of a specific permanent establishment outside the EU, which fulfils the role as recipient of services destined for the whole group of companies.

Proof of the contrary must be given by the taxable person, who must indicate other motives for setting up the structure than only fiscal ones, such as financial and economic motives. The so-called “procedure of advanced rulings” should be of help here.

If the proposal becomes law, the new regulation will be applicable with retroactive effect, i.e. for deeds which have been concluded as from 1 November 2005.

For more information regarding this issue please do not hesitate to contact:Jan Servaes (+32 (0)2 710 7363)

DenmarkPartial right of VAT recovery for holding company

On 10 November 2005 the High court ruled that a holding company only has a partial right to recover VAT on overall costs if the holding company, besides VAT taxable activities, also manages its subsidiaries. In this instance, the holding company had not invoiced the subsidiaries for the management charges.

The High Court was of the opinion that the management activities merely arose as a result of ownership of the assets and therefore the activities did not constitute entitlement to VAT recovery. The High Court ruled that the fact that the holding company had not invoiced the subsidiaries for the services confirmed that the services arose as a result of ownership and not as a VAT taxable directly management of the subsidiaries.

The partial VAT recovery right was determined based on the estimated usage of the costs for the VAT taxable activities in accordance with published practice for holding companies in Denmark affected from end of 1999.

For more information regarding this issue please do not hesitate to contact:Jan Huusmann Christensen (+45 3945 9452)Anette Henriksen (+45 3945 3903)

Europe / NetherlandsWhere do we stand after Andersen?

On 25 November 2005 the European Commission answered a question about the implementation measures to bring local VAT law in line with the Andersen ruling.

BackgroundOn March 3, the European Court of Justice (‘ECJ’) delivered its decision regarding the Andersen case

(C-472/03) concerning the VAT status of back office activities provided to an insurer.

In this case the ECJ decided that certain ‘back office’ insurance services provided by third party providers would not be VAT exempt. Given the particular trend towards outsourcing in the sector, this decision could have a huge impact on existing and future outsourcing contracts.

Until now, the tax authorities in many countries did however not release guidance/amend legislation to bring the local VAT law in line with the ECJ decision.

As it seems, the proposed study on modernising the VAT rules for financial services, might provide “cover” for Member States to sit tight until the study has run its course.

In this respect, we were informed that the European Commission has ‘advised’ the tax authorities in each EU Member State to defer the implementation of measures to bring local VAT law in line with the recent ECJ decision.

Although announced in the context of a review of VAT and financial services generally, it would appear to be in direct response to the recent Andersen case.

Question to the European CommissionSince this kind of information is critical to the insurance industry we asked the European Commission a confirmation on whether the EU Member States have been 'advised' not to take action or implementation measures to bring local VAT law in line with recent ECJ decisions. In this respect we received the following reaction:

“The Court of Justice has ruled that the VAT exemption for financial services does not apply to certain outsourced services in the insurance industry. Member States are bound to follow Court of Justice rulings, amending their rules if necessary in order to do so.

The Commission is currently finalising its programme of work for 2006 on modernising the VAT provisions on financial services and insurances. It is in informal contact with Member States on this issue. The intention is that, after a consultation of all interested parties, this will lead to a legislative proposal in the second half of the year. In the course of informing Member States of its intentions, the Commission has suggested that when contemplating any steps nationally in this area, they take account of the likely evolution at Community level.

The Commission envisages the publication of an analytical paper setting out some options for tax reform in this area in the early part of 2006. This will form the basis of an extensive public consultation”.

CommentsGiven the reaction of the European Commission, the EU Member States are bound to follow the ECJ ruling and have to bring their local VAT law in line with the Andersen ruling.

Belgium for instance already has officially declared that tax payers must bring their VAT situation in line with the Andersen-ruling. Most recently they have expressed their intention to initiate negotiations with representatives from the insurance intermediary sector.

As may be the case in other jurisdictions, the relating Belgian VAT rules are just outdated in both a pre- and post Andersen era and are not adapted to developments and activities within the sector.

However, since the European Commission (probably) does not initiate infringement proceedings if a Member State failed to implement the exemption in accordance with the ECJ decision, it is likely that most Member States at least sit tight until the proposed study on modernising the VAT rules for financial services study has run its course.

For more information regarding this issue please do not hesitate to contact:Ine Lejeune (+32 9 268 8300)Frans Oomen (+31 (0)20 568 4781)Michiel van Oss (+31 (0)20 568 4341)

Europe / NetherlandsInterpretation ‘management of special investment funds’ - Preliminary questions referred by Dutch Supreme Court

On 18 November 2005 the Supreme Court referred a case for a preliminary ruling on the interpretation of Article 13B(d)(6) of the EC Sixth Directive, which exempts the ‘management of special investment funds as defined by Member States’.

The Dutch Supreme Court raised questions with the European Court of Justice on the following structure.

BackgroundA Dutch company (A BV) performs the asset management of several collective investment funds against remuneration. The management board of A BV exists of four other BV’s.

In July 1992 an agreement is concluded by A BV under which X BV performs the general and daily management of the activities of A BV in the function of statutory director. More precisely, X BV performs the daily management of various collective investment funds set up by A BV and for which A BV was appointed the fund manager.

At the fulfilment of these management services X BV was bound by the statutory instructions, the instructions of the managing director companies and the instructions as raised during the shareholders meetings.

A BV incurs no VAT on the fees charged by X BV as parties assume that the exemption of Article 13B(d)(6) of the EC Sixth Directive applies.

A BV

X BV managingdirector

company

Fund I Fund II

B C D

Management of special investment funds?

(Fund manager)

managingdirector

company

managingdirector

company

X BV

dX

A BV

X BV managingdirector

company

Fund I Fund II

B C D

Management of special investment funds?

(Fund manager)

managingdirector

company

managingdirector

company

X BV

dX

Questions referredThe case is referred by the Dutch Supreme Court to the European Court of Justice and the following questions are asked:

Does the exemption for “management of special investment funds as defined by Member States” contained in Article 13B(d)(6) of the EC Sixth Directive merely depend on the nature of the services rendered or is it also dependent on the requirement that the person who performs the management services has a legal relationship with the participants in the special investment fund?

Could a service consisting of the management of special investment funds be qualified as management under Article 13B(d)(6) of the EC Sixth Directive if these services are performed in the capacity of managing director of the company appointed as the manager of these special investment funds?

We strongly recommend investigating as soon as possible what the consequences could be of the outcome of this case in your specific situation. It would then be possible to file protective claims in order to secure your VAT position.

For more information regarding this issue please do not hesitate to contact:Frans Oomen (+31 (0)20 568 4781) Milo Hartendorf (+31 (0)20 568 5883)Joost Vermeer (+31 (0)20 568 6774)

GermanyFurther prolongation of transitional period for VAT exemption of financial sub-intermediary services by German Federal Ministry of Finance

The Federal Ministry of Finance issued a decree on 13 December 2004, dealing with the VAT exemption of financial intermediary services regarding the application of the Federal Fiscal Court decision dated October 9, 2003 (V-R-5/03).

This decree confirmed that the Federal Fiscal Court decision is applicable to any intermediary services which are VAT exempt under the German VAT Law (except for services rendered by insurance agents and building and loan association agents).

Accordingly, the intermediary must have a direct contract with, and has to be remunerated by, one of the future parties of the contract in order to render a VAT exempt intermediary service. By decree dated 30 May 2005, the Federal Ministry of Finance granted a transition period for the VAT exemption of financial sub-intermediary services until 31 December 2005.

The Federal Ministry of Finance then issued a further decree dated 25 November 2005. According to this decree, intermediary services under sec 4 No 8 b - g of the VAT Act implementing Art 13(B)(d) 2 - 5 of the EC Sixth Directive will be VAT exempt until further notice even if the intermediary does not have a direct contract with, and is not remunerated by, one of the future parties of the concerned supply.

Under sec 4 No 8 b - g of the VAT Act implementing Art 13(B)(d) 2 - 5 of the EC Sixth Directive, transac-tions including negotiation, in credit guarantees, de-posit and current accounts, payments, transfers, cheques, currency, bank notes and coins, shares and other securities are exempt from VAT.

Sub-intermediary services regarding loans (sec 4 No 8a VAT Act, Art 13(B)(d) 1) are not mentioned in the decree.

Based on the last decrees such services do not fall under the VAT exemption due to the decision of the Federal Fiscal Court dated 9 October 2003.

For more information regarding this issue please do not hesitate to contact:Sylvia Neubert (+ 49 69 9585 62 35)Christian Schubert (+ 49 69 9585 66 65)

GermanyNew amendment rules regarding input VAT-decree of the German Federal Ministry of Finance of 6 December 2005

As of 1 January 2005, new rules are applicable for the amendment of input VAT amounts. Prior to this date only input VAT referring to fixed assets had to be amended pro rata temporis in case of a change in use. According to the new rules, input VAT referring to current assets has to be amended as well. The same applies to input VAT referring to goods that are installed into fixed assets or services that are performed on fixed assets. Additionally, input VAT referring to all other kinds of services has to be amended.

The Ministry of Finance has published a decree on 6 December 2005 to explain the application of the new rules.

The new rules regarding current assets do not lead to an amendment of pro rata temporis (in Germany 10 years for real estate and five years for all other goods), but to a full amendment at the point of time the asset is used.

The goods that are installed into fixed assets have to be amended pro rata temporis based on an amendment period, which has to be determined in addition to the amendment period of the fixed assets. The amendment rules have to be applied regardless of whether the installation of the goods leads to an increase of the value of the fixed asset or not. An ex-ample for such kind of good is an air conditioning that is installed into a car.

According to the decree, services that are performed on fixed assets only fall under the amendment rule if they are not already used at the point in time when they are received. Therefore, input VAT referring to the cleaning of a building does not lead to an amendment, whereas input VAT referring to a new paint of the building, has to be amended.

For simplification purposes the Ministry of Finance accepts that input VAT referring to other kinds of services is amended only if these services have to be capitalized in the balance sheet for income tax pur-poses (e.g. software).

For more information regarding this issue please do not hesitate to contact:Sylvia Neubert (+ 49 69 9585 62 35)Christian Schubert (+ 49 69 9585 66 65)

Ireland Irish Revenue's interpretation of Kretztechnik

The Revenue have published their interpretation of the Kretztechnik judgement which dealt with the issue of VAT deductibility in relation to the issue of shares by an Austrian company wishing to increase its share capital. Revenue will implement the judgement fully where the circumstances of Kretztechnik are replicated.

In the case of FS companies, the deductibility entitlement should be at the general VAT recovery rate. Interestingly, Revenue stated also that the judgement will apply to other forms of capital raising e.g. note issues, eurobonds and similar financial instruments but will not apply to mergers and acquisitions as Revenue is of the view that mergers and acquisitions are not primarily aimed at raising new capital and therefore do not fall within the ambit of the judgement.

For more information regarding this issue please do not hesitate to contact:Colm Blaney (+353 (0)1 662 6741)

IrelandIrish Revenue issue clarification regarding the VAT treatment of Canteens

Following the ECJ judgement in the Hotel Scandic case, the Irish Revenue have issued operational instructions for guidance purposes.

Revenue have formally acknowledged that the existing treatment of subsidised canteens is inconsistent with the relevant provisions of the EU Sixth VAT Directive and that as a consequence employers may have overpaid VAT and may now be entitled to a refund for some or all of that VAT depending on the particular method of operation of the canteen in question.

For more information regarding this issue please do not hesitate to contact:Colm Blaney (+353 (0)1 662 6741)

NetherlandsDecree on commencement date fiscal unity for VAT issued

On 22 April 2005, the Supreme Court ruled in a case which has a huge impact on the date of commencement of a VAT group.

The Supreme Court ruled that for VAT purposes, a VAT Group exists by law when the conditions are met. Based on that ruling an approval of the tax authorities was in our opinion no longer required for commencing a VAT group.

The State Secretary of Finance has now issued a decree stating otherwise. In his opinion the ruling of the Dutch Supreme Court only adjusts the commencement date of the VAT Group but not the obligation of obtaining an approval of the Ministry of Finance.

The State Secretary of Finance has issued a Decree on 1 November 2005 stating that in his opinion an approval is still necessary to be qualified as a VAT Group. He does however acknowledge that the commencement date of a VAT group can be influenced by the ruling of the Dutch Supreme Court.

Until the law is adjusted, the State Secretary allows that assuming the parties involved agree and the conditions of connection are met:

The commencement date of the VAT group is the date mentioned in the request if the parties involved take up the initiative

The commencement date of the VAT group is de-termined in dialogue if the tax authorities take the initiative

Practical implicationsThe downside consequence of a VAT group is the several liability for VAT debts of the group. Besides formalising the point of commencement of the VAT Group, the State Secretary of Finance wants to ensure the timing of the several liability for VAT debt of the VAT Group with this decree.

For more information regarding this issue please do not hesitate to contact:Hans Vervloed (+31 40 224 4771) Paul Hulshof (+31 38 427 2729)Frans Oomen (+31 20 568 4781)

United KingdomPre Budget announcements regarding response judgement Andersen

The Chancellor has announced in the Pre Budget Report (‘PBR’) that the Government will delay the introduction of changes to the legislation in response to the judgement of the European Court of Justice(’ECJ’) in Arthur Andersen & Co Accountants (C-472/03) (‘Andersen’), pending the wider review of the VAT treatment of financial services and insurance by the European Commission (’EC’).

The EC is currently finalising its program of work for 2006, and intends to release legislative proposals in the second half of 2006.

Following the close of HM Revenue and Customs's consultation period on 30 September 2005, news of changes to the VAT legislation to narrow the scope of the exemption currently afforded to insurance related services has been eagerly awaited.

Little clarity has been provided by the Chancellor's PBR, which states merely that the Government has decided to delay implementation of the ECJ judgement indefinitely.

It will monitor the progress of the EC review on the VAT treatment of financial services and insurance in deciding when to make the necessary changes to the law. The Government undertakes to ‘provide industry with sufficient notice in advance of implementation’.

Practical implicationsHMRC have confirmed that here will be no legislative changes or any changes to the guidance notes during this period.

The situation will be re-assessed in Autumn next year and, depending on the progress of the EU review, amendments to the legislation may or may not be announced.

Andersens changes may, therefore, be postponed in the UK beyond next Autumn, but not indefinitely.

Whilst a delay in implementation of the Andersen case in the UK is generally welcome, there is a degree of uncertainty which makes contract negotiations somewhat complex.

For more information regarding this issue please do not hesitate to contact:Cathy Hargreaves (+44 (0) 20 7212 5575)Ben Flockton (+44 (0) 20 7213 1023)

ContactFor more information, please do not hesitate to contact your local PricewaterhouseCoopers Indirect Tax expert or one of the below mentioned experts:

AustriaChristine Sonnleitnertel: +43 1 50188-3630

BelgiumFrancois Mennigtel: +32 2 7104364

CyprusChrysilios Pelekanostel: +357 22 555280

Czech RepublicVaclav Patektel: +420 251 152 569

DenmarkJan Huusmann Christensen tel: +45 39 459 452

EstoniaAin Veidetel: +372 6 141 978

FinlandJuha Laitinentel: +35 89 228 01409

FranceStéphane Henriontel: +33 1 56574139

GermanySylvia Neuberttel: +49 69 958 56235

GreeceMary Psyllatel: +30 210 687 4444

HungaryTamas Locseitel: +36 14 619 358

IrelandJohn Fay tel: +35317048701

ItalyPier Luca Mazzatel: +39 02 6699 5732

LatviaHelen Barker tel: +371 709 4421

LithuaniaKristina Bartusevicienetel: +370 5 2392 365

Luxembourg Michel Lambiontel: +352 494 848 3126

MaltaDavid A. Ferry tel:’+356 256 46712

NetherlandsFrans Oomentel: +31 20 568 47 81

NorwayYngvar Engelstad Solheimtel: +47 95260657

PolandMarcin Chomiuktel: +48 225 234 760

PortugalMario Braztel: +351 21 7914 4053

RomaniaDiana Coroaba tel: +40 212 028 693

SlovakiaEva Fricovatel: +421 2 5441 41 01

SloveniaCrtomir Borectel: +38 614 750 152

SpainMiguel Blascotel: +34 9 1568 4798

SwedenLars Henckeltel: +46 85 553 3326

SwitzerlandTobias Meier Kerntel: +41 58 792 43 69

United KingdomCathy Hargreaves tel: +44 207 212 5575

Disclaimer. Clients receiving this Alert should take no action without first contacting their usual PricewaterhouseCoopers Indirect Tax Advisor.

PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services for public and private clients. More than 120,000 people in 144 countries connect their thinking, experience and solutions to build public trust and enhance value for clients and their stakeholders.© 2005 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.*connectedthinking is a trademark of PricewaterhouseCoopers LLP.