18 April 2013

Opinion of the Advocate General on the VAT deductibility right of costs incurred in the implementation of pension funds

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On 18 April 2013, the Advocate General released its conclusions in the case C-26/12 PPG Holdings B.V. c.s. which was referred to the European Court of Justice (ECJ) by the Dutch Court Gerechtshof te Leeuwarden.

In its conclusion, the Advocate General invited the Court to confirm that a taxable person who has established a separate pension fund for the purpose of safeguarding the pension rights of his employees, cannot be granted with the right to deduct the input VAT he has paid on the basis of services supplied to him in respect of the management and the operation of the pension fund, while VAT incurred on services paid for the setting up of the fund could be deductible. The Advocate General has also reiterated the criteria to be applied in the interpretation of “special investment fund” within the terms of the VAT Directive 2006/112/EC1. In this alert, we will develop the arguments of the Advocate General.

Questions referred

The questions referred by the Dutch Court have been defined as follows:

Can a taxable person who, pursuant to national pensions legislation, has established a separate pension fund for the purpose of safeguarding the pension rights of his employees and former employees, as participants in the fund, deduct the tax which he has paid on the basis of services supplied to him in respect of the implementation of the pension provision and the operation of the pension fund, pursuant to Articles 168 and 169 of Directive 2006/112/EC?

Can a pension fund, established with the objective of providing a pension for the participants in the pension fund at the lowest possible cost, where assets are brought to and invested in the pension fund by or on behalf of the participants, and where the resulting proceeds are shared, be classified as a 'special investment fund' within the terms of Article 135, 1, (g) of Directive 2006/112/EC?

Analysis of the Advocate General

Regarding the first question, the Advocate General firstly reiterates the reasoning behind why the legal and fiscal separation between the pension fund and the taxable person, who implemented it, in this case with respect to PPG, is required. Such a separation aims to protect beneficiaries not only against the employer’s insolvency but also against any possibility that the fund’s assets might be ‘raided’ to deal with even a temporary cashflow problem or might be otherwise diverted from their intended purpose.

The Advocate General recognizes that it was the PPG which had contracted and paid for the services in issue. However, this argument is not relevant since the services were finally used by the fund for the purposes of its own activity, which is not only radically different but also legally and fiscally separate from that of the PPG. Therefore it is the criterion of the “distinct economic activity” between the fund and the taxable person which prevails according to the Advocate General. On this basis, the Advocate General concludes that:  “a taxable person who has established a pension fund as a separate entity for legal and fiscal purposes, in order to safeguard the pension rights of his employees and former employees, may not deduct the tax which he has paid on services supplied to that fund in connection with its management and operation”.

However, the Advocate General agrees with the United Kingdom’s submission that an employer may be in a position to deduct VAT on any inputs acquired for the purposes of setting up the fund, enrolling employees in the fund, ensuring that its own contributions are made timeously, and so on. Indeed, it is considered that such activities fall within the sphere of the employer’s activity as a whole when the costs relate to goods or services consumed by the employer and not within that of the separate fund.

It is thus necessary to distinguish between costs linked to the setting up of the fund and costs linked to the management and operation of the fund.

Regarding the second question, the Advocate General considers that it has essentially been answered by the Court’s judgment Wheels Common Investment Fund2. Hence, a pension fund cannot be qualified as “special investment fund” for the purposes of the exemption of their management since:

  • The participants do not bear the risk arising from the management of the investment
  • The contributions paid by the employer are a means by which he complies with his legal obligations towards his employees.

The ruling of the ECJ to be delivered in relation to this case in the coming months shall be of importance to any taxable person who has established a separate pension funds in Luxembourg. Indeed, even if the Advocate General does not accept the VAT deduction right to be granted on costs related to the implementation of a separate fund, ECJ is not bound by these conclusions.

EY will keep you informed on further developments as well as the final decision taken by the ECJ. 

Download the Tax Alert. (pdf, 158.3kb)

1Directive Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax.
2Case C 424/11