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Financial Services VAT Alert Tracking EU VAT Developments Edition 2011/4 April 2011

Editorial Welcome to the April edition of the FS VAT Alert. In this edition we update you on the infringement proceedings against some EU Member States allowing non-taxable persons as members of a VAT group. Further news at EU level seems to show that political agreement on the FS VAT proposals is still far away. We also have an interesting case from Germany on the extension of the cost sharing exemption in the financial sector. Italy reports on the guidelines of the VAT authorities on the VAT treatment of the granting of loans as an ancillary activity. Luxembourg shares news related to the Asset Management industry and the UK reports on guidance regarding VAT recovery. Denmark, Czech Republic and Slovakia inform respectively on increased VAT recovery on hotel costs (DK), proposal to have a single VAT rate as from 2013 (CZ), proposed measures to fight against tax fraud and the proposed decrease of the standard VAT rate (SK). More details below. Chantal Braquet (Editor)

Contents

EUROPEAN UNION 1.

EU Commission refers Ireland, the Netherlands and the UK to the ECJ for allowing non-taxable persons to join VAT groups

2. Directive & Regulation on the VAT treatment of insurance and financial service removed from the agenda of the ECOFIN of 17th May GERMANY 3. Exemption from VAT for cost sharing arrangements ITALY 4. VAT recovery ratio calculation –Tax Authorities’ guidelines

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LUXEMBOURG 5. VAT authorities confirm status of contractual funds regarding the reporting and payment of VAT 6. VAT Breakfast session: the AM industry UNITED KINGDOM 7. Partial exemption for insurers: joint publication by HMRC and Association of British Insurers 8. Tax authority guidance on new prorata rules for capital items

EUROPEAN UNION 1. EU Commission refers Ireland, the Netherlands and the UK to the ECJ for allowing non-taxable persons to join VAT groups In November 2009, we reported on the infringement proceedings initiated by the EU Commission against eight EU Member States (CZ, DK, ES, FI, IE, NL, SE and UK) in relation to the admission of non-taxable persons to VAT groupings. The proceedings against Sweden were already brought before the Court of Justice of the European Union (“ECJ”) in December 2010. The proceedings against Ireland, the Netherlands and the UK are now also brought before the ECJ. In the view of the Commission, only taxable persons are permitted to join VAT groups. It would therefore seem to be only a matter of time before the further infraction proceedings initiated at the same time against the four other Member States also go to the ECJ. It remains to be seen how this matter will be resolved. The Commission's position is not always supported by the ECJ, and it remains possible that the VAT grouping rules may be retained. However, businesses which could be adversely affected if the Commission is successful should bear this in mind when considering their VAT grouping position and the way in which their corporate structure could give rise to future additional VAT costs.

This development and others emphasises the importance of ensuring, as far as possible, that holding companies are carrying on some form of economic activity for VAT purposes. If you would like to discuss this development in more detail and the implications it may have for your business structure/group, please contact your usual PwC VAT adviser.

2. Directive & Regulation on the VAT treatment of insurance and financial service removed from the agenda of the ECOFIN of 17th May In the last FS VAT Alert, we reported on the intention of the Hungarian Presidency to submit the proposal of the Directive and Regulation to the ECOFIN on 17th May to reach political agreement. After the meeting of the working parties held on 2nd May 2011, this topic has now been removed from the agenda of the ECOFIN as there are still some (important) problems to be solved. The main items causing problems are the VAT treatment of outsourced services, derivatives and management of investment funds. The next meeting of the working parties will take place in June. It will then be decided if some problems will be presented to the June ECOFIN. However, agreement on the proposals seems no longer feasible under the Hungarian Presidency. Frans Oomen +31 887925156 [email protected]

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DID YOU KNOW? EUROPEAN UNION Hearings at the Court of Justice of the European Union On 10 respectively 12 May, the hearings in the following cases are scheduled: • C-350/10, Nordea Pankki Suomi SWIFT services; • C-93/10, GFKL Financial Services - sale of defaulted debts as economic activity at the level of the purchaser; These are two important cases for the FS industry. The first one should confirm the VAT treatment of SWIFT services and the second could give more clarification regarding the largely discussed judgment of the ECJ in the case MKG (C-305/01).

DID YOU KNOW? CZECH REPUBLIC Agreement to 17.5% unified VAT rate as from 2013 The government coalition parties have agreed that the reduced VAT rate will be 14% with effect from 1 January 2012, and that a single VAT rate of 17.5% will apply as from 1 January 2013. The question, however, is whether the current agreement will remain unchanged.

GERMANY 3. Exemption from VAT for cost sharing arrangements The EU Commission requests Germany to extend the cost sharing exemption of article 132 (1) f) of the VAT Directive (important for all financial service providers) The EU Commission has formally requested Germany to amend its VAT legislation and to extend the scope of the cost sharing exemption (VAT exemption for services supplied by independent groups of persons to their members without right to deduct input VAT due to their VAT exempt activities). The German legislation still restricts this possibility to services in the medical and healthcare sector, whereas EU law requires such VAT exemptions to be available for all sectors. The cost sharing exemption would give banks and insurance companies much more options to save nondeductible input VAT. The Commission's request takes the form of a "Reasoned Opinion" (second step of EU infringement proceedings). In the absence of a satisfactory response within two months, the Commission may refer Germany to the ECJ. Financial services providers in Germany should check whether they could profit from the cost sharing exemption as it is likely that the German government will try to establish the exemption in the national law in the near future as already tried but refused by the parliament in 2010. Elmar Jaster +49 221 2084 203 [email protected]

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ITALY 4. VAT recovery ratio calculation –Tax Authorities’ guidelines The Italian tax authorities have recently issued guidance on the calculation of the VAT recovery ratio in case of granting of loans or intermediation in the granting of loans by car dealers (Ministry of Finance’s ruling no. 41/E, dated 5 April 2011) The ruling is about the interpretation of the Italian VAT Law regarding the pro-rata calculation for car dealers granting loans or acting as intermediaries in the granting of loans. In case car dealers grant loans or act as intermediaries in the granting of loans, the Italian tax authorities, after having accepted that these services are VAT exempt, have: • confirmed that these activities do not have to be included in the pro-rata calculation in case they are ancillary to the main activity carried out by the car dealer; • established that the above financial services are to be considered as ancillary in case they imply a limited use of work, goods and services subject to VAT (in other words, no specific organization dedicated to these activities should exist). The above opinion is in line with different Italian Tax Court Cases. Alessia Angela Zanatto +39 0 291605728 [email protected]

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DID YOU KNOW? DENMARK Increase of VAT recovery on hotel costs As from 1 January 2011, VAT recovery on hotel costs has increased from 25% to 50% of the VAT incurred on such costs. VAT recovery on restaurant costs is still limited to 25% of the VAT incurred on such costs. Also, the costs must be strictly business related. For further details, please contact Anette Henriksen ([email protected]).

LUXEMBOURG 5. VAT authorities confirm status of contractual funds regarding the reporting and payment of VAT Contractual funds cannot obtain their own VAT registration number in Luxembourg In the January 2011 edition of the FS VAT Alert we mentioned that Luxembourg is the first country that has implemented the UCITS IV Directive and that PwC Luxembourg is closely looking at UCITS IV and what this means from a VAT point of view. In a meeting between representatives of the professional Association of the Luxembourg Fund Industry (“ALFI”) and the Luxembourg VAT authorities beginning of March this year, the Luxembourg VAT authorities confirmed that from a Luxembourg VAT point of view, contractual funds such as FCP (“Fonds Commun de Placement”) cannot obtain their own VAT

registration number as they do not act independently. In the case of contractual funds, the Luxembourg VAT authorities consider that the management company carries out the collective investments for the investors and has to comply with the VAT obligations arising therefrom, i.e. register for VAT and reverse charge Luxembourg VAT on services received by the FCP (unless an exemption applies). As a consequence, the Luxembourg VAT authorities will continue considering the management company of the contractual funds as the person liable to pay VAT. It has not yet been confirmed whether contractual funds could get a VAT identification number in different EU Member States. Locating the contractual fund in another jurisdiction than the management company is a new situation for almost all EU Member States and clarification is to be expected over time. Marie-Isabelle Richardin + 352 49 48 48 3009 [email protected]

6. VAT Breakfast session: the AM industry Further to the large success of the first edition of PwC Luxembourg’s VAT Breakfast: the AM Industry, an additional session will take place on Tuesday 24 May 2011, from 8.30am to 10.30am. This event will endeavour to bring experts and other industry representatives together to share views and exchange experiences on the following topics: • taxation of “isolated” outsourced fund management services; • input VAT recovery for Luxembourg management companies;

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• reorganisation of the Luxembourg VAT offices; • force of Attraction; • UCITS IV and other regulatory changes; • EU FS Proposal Directive and Regulation; • the new FAIA (SAF-T) obligation in Luxembourg. For further details and registration, please contact Pauline Greff at: [email protected].

DID YOU KNOW? LUXEMBOURG / NETHERLANDS FATCA and VAT Since the discussions on FATCA started, PwC has been looking at the impacts and opportunities brought by these rules for VAT. As a matter of fact, FATCA imposes a greater burden on financial institutions dealing with US investors but from a VAT point of view, this may open some opportunities as regards input VAT recovery. For further details, please contact Chantal Braquet ([email protected]).

DID YOU KNOW? SLOVAKIA Proposal to reduce VAT rate to 19% The opposition deputies have presented a proposal to decrease the standard VAT rate from the current 20% to 19%, and to adopt on an ongoing basis the reduced 6% rate for the sale of agricultural products by farmers. The proposal would amend the VAT rates to their pre-1 January 2011 level.

DID YOU KNOW? SLOVAKIA Finance Ministry proposals to fight tax evasion The Slovak Ministry of Finance has debated proposals for measures to fight evasion of VAT and excise duties. The aim of the proposed measures is to introduce efficient and effective procedures to reduce opportunities for fraudulent activities without creating an additional administrative burden for businesses.

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UNITED KINGDOM 7. Partial exemption for insurers: joint publication by HMRC and Association of British Insurers HMRC and the ABI have published a joint document, 'Partial Exemption Guidance for the Insurance Sector'. The ‘Partial Exemption Guidance for the Insurance Sector’ is neither binding nor mandatory, but is intended to assist insurer and insurance-related businesses by providing guidance and explaining broad principles which should facilitate negotiation of partial exemption special methods. The document is a helpful reminder of some of the principles behind partial exemption, including attribution, apportionment, sectorisation and alternatives to outputs-based methods, e.g. transaction count, head count and floor area. However, each business must negotiate its special method individually, taking into account not only what constitutes a ‘fair and reasonable’ outcome, but also the amount of administration that a more complex method may require in comparison to the value of additional recoverable input VAT.

8. Tax authority guidance on new pro-rata rules for capital items Businesses which are required to apportion VAT incurred for partly business and partly non-business activities, or carry out partial exemption calculations and capital goods scheme (CGS) adjustments, need to become familiar with new guidance issued by the UK tax authority (HMRC). There are significant changes from the pre-2011 recovery and adjustment regime, and the inclusion of boats and aircraft within the CGS will bring numerous businesses within its scope for the first time. HMRC recommends that the guidance should be read by businesses which: • incur VAT relating to land and property, ships, boats or other vessels, or aircraft that are to be used for exempt or nonbusiness/private activities; • already use Lennartz accounting for any assets; • currently have items in the CGS; • are representative members of VAT groups with CGS items; and/or • acquire CGS items before they register for VAT. Your usual PwC VAT adviser will be happy to discuss any aspect of these matters with you in more detail. Jamie Randell +44 207 213 8253 [email protected]

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DID YOU KNOW? UNITED KINGDOM Policy change on penalties for 'delayed tax' errors The UK tax authority, HMRC, has amended its policy on penalties charged on 'delayed tax' errors. A delayed tax error is one where an amount of tax was underpaid in one return period but corrected in the next (e.g. where output VAT was omitted from one return but the omission corrected in the next). In future, HMRC will charge a reduced penalty if it is satisfied that the error would have been reversed by the taxpayer. Taxpayers who have been penalised at the full level in the past are invited to ask HMRC to review the penalty retrospectively.

Contact For more information, please do not hesitate to contact your local PwC Indirect Tax expert or one of the experts mentioned below: Austria

Greece

Poland

Christoph Wagner tel: +43 1 501 88 36 41 [email protected]

Mary Psylla tel: +30 210 687 4543 [email protected]

Marcin Chomiuk tel: +48 22 523 4807 [email protected]

Belgium

Hungary

Portugal

Thierry Noël tel: +32 2 710 7344 [email protected]

Tamas Locsei tel: +36 14 619 358 [email protected]

Mario Braz tel: +351 213599652 [email protected]

Bulgaria

Ireland

Romania

Nevena Haygarova tel: +359 2 9355 162 [email protected]

John Fay tel: +353 1 792 8701 [email protected]

Diana Coroaba tel: +40 21 202 8693 [email protected]

Cyprus

Italy

Slovakia

Chrysilios Pelekanos tel: +357 22 555 280 [email protected]

Nancy Saturnino tel: +39 02 9160 56 02 [email protected]

Valeria Kadasova tel: +421 2 59 350 626 [email protected]

Czech Republic

Latvia

Slovenia

Martin Diviš tel: +420 25115 2574 [email protected]

Ilze Rauza tel: +371 6 7094512 [email protected]

Marijana Ristevski tel: +386 1 583 6019 [email protected]

Denmark

Lithuania / Belarus

Spain

Jan Huusmann Christensen tel: +45 3945 9452 [email protected]

Kristina Krisciunaite tel: +370 5 239 2365 [email protected]

Miguel Blasco tel: +34 9 1568 4798 [email protected]

Estonia

Luxembourg

Sweden

Tanja Kriisa tel: +372 614 1977 [email protected]

Marie-Isabelle Richardin tel: +352 49 48 48 3009 [email protected]

Lars Henckel tel: +46 8 5553 3326 [email protected]

Finland

Malta

Switzerland

Juha Laitinen tel: +358 9 2280 1409 [email protected]

David A. Ferry tel: +356 2564 6712 [email protected]

Tobias Meier Kern tel: +41 58 792 43 69 [email protected]

France

The Netherlands

United Kingdom

Stéphane Henrion tel: +33 1 56 57 41 39 [email protected]

Frans Oomen tel: +31 88 792 51 56 [email protected]

Jamie Randell tel: +44 207 213 8253 [email protected]

Germany

Norway

United States

Felix Becker tel: +49 69 9585 6665 [email protected]

Yngvar Engelstad Solheim tel: +47 95 26 06 57 [email protected]

Ossie Osman tel: +1 646 471 1820 [email protected]

Disclaimer. Clients receiving this Alert should take no action without first contacting their usual PwC Indirect Taxes Advisor. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. ‘PwC’ is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together these firms form the PwC network. Each firm in the network is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.

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