8 August 2013
PPG Holdings - CJEU judgment on the VAT recovery of pension fund costs
Luxembourg Tax Alert
Employers entitled to recover VAT on pension fund investment management costs (as well as administrative costs)
The Court of Justice of the European Union (CJEU) has delivered on 18 July 2013 its judgment in the case of PPG Holdings BV (PPG) (C-26/12) on the extent to which an employer can deduct VAT incurred on costs relating to a defined benefit pension fund established as a separate legal entity. Significantly, the CJEU held that, in circumstances where the employer paid those costs and did not pass them on to the pension fund, the employer was entitled to recover the VAT incurred thereon.
This Dutch referral asked whether an employer is entitled to recover the VAT on administrative and certain other services relating to its own employee pension scheme, as being for the purpose of the employer’s business, and whether a pension fund can be regarded as a “special investment fund” for the purposes of Article 135(1)(g) of the VAT Directive (Implemented in article 44.1.d) of the Luxembourg VAT law), the management of which qualifies for VAT exemption.
PPG, a fully taxable group of companies, set up a defined benefit pension fund for its employees into which the companies paid contributions. The employees made no pension contributions. By law, the fund had to be separate from PPG and was, therefore, housed within a separate legal entity. PPG contracted with (and paid) various service providers for administration, asset management, auditing and consultancy services to be provided to the fund. These costs were not passed on to the pension fund. PPG sought to deduct the VAT paid on these services as its input tax, which the tax authorities disallowed.
The referring court asked whether PPG was entitled to deduct the VAT incurred on these costs (As being attributable to its fully taxable business). If not, the question was whether the services were properly exempt from VAT by virtue of Article 135(1)(g) on the basis that the pension fund was a special investment fund.
On the question of input tax deduction, the Advocate General opined that VAT on services consumed by the fund for its own activities is not recoverable by the employer, although some of the management services would have been supplied to the employer.
However, the CJEU’s judgement is much more in favour of the taxpayer. It has held that any VAT incurred on costs relating to the management and operation of that fund is recoverable by the employer, where those costs are not passed on to the pension fund. The right to deduct the VAT exists on the basis that there is a direct and immediate link between these costs and the taxable business activities of the employer.
Given its decision that the services were supplied to the employer, it was not necessary to answer the second question as to whether the pension fund was a special investment fund such that the management services were exempt (Although it noted that the same question had been answered in the negative in Wheels Common Investment Fund Trustees Ltd (C-424/11)).
What is the impact for Luxembourg businesses?
The facts and circumstances surrounding each situation can be very different. We thus strongly recommend that each potentially impacted company reviews its own position in the light of the CJUE ruling to assess the deductibility of VAT in respect of costs incurred during the past five years (statute of limitation period), as well as to mitigate potential VAT costs for the future by reviewing costs related arrangements.
It should also be reminded that the Court has ruled that services to a defined benefit (DB) scheme cannot benefit from the VAT exemption laid down in respect of management services of investment funds (Wheels Common Investment Fund Trustees Ltd (C-424/11) 7, March 2013). The Court will also have to decide whether a defined contribution (DC) scheme could benefit from such VAT exemption (ATP Pension Services A/S Case (C- 464/12) while currently the Luxembourg VAT law exempts from VAT the management of pension funds. For more information, we refer to our Tax Alert, “VAT on management services rendered to pension schemes”, March 2013.
The landscape of the VAT rules applicable to pension schemes and funds is in constant evolution and should be carefully monitored by potentially impacted businesses.
EY has a global Indirect Tax practice which is experienced in providing support in relation to technical VAT issues. If you feel that the case could potentially have implications for your business, and you would like to discuss the position in more detail, please speak with an EY Indirect Tax contact.
Download the tax alert (pdf, 111kb)