Financial Services VAT Alert. Tracking EU VAT Developments

www.pwc.com/nl Financial Services VAT Alert Tracking EU VAT Developments Edition 2013/2 Editorial Dear readers, It is our pleasure to present you w...
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Financial Services VAT Alert Tracking EU VAT Developments Edition 2013/2

Editorial Dear readers, It is our pleasure to present you with the April / May edition of FS VAT Alert. This edition brings you the most important VAT-related developments of the past two months. Please enjoy the read! Stan Beelen

Contents EUROPEAN UNION VAT on Directors’ legal fees not recoverable by the company (Wolfram Becker, case C104/12) Outsourced investment management services can be VAT-exempt (GfBk Gesellschaft für Börsenkommunikation GmbH, case C-275/11) Management of ‘defined benefit’ pension scheme not VAT exempt (Wheels Common Investment Fund Trustees Ltd, case C-424/11) Advocate General concludes that pro-rata calculation should exclude out-of-country income (Le Crédit Lyonnais, case C-388/11) Questions to CJEU on cross-border inter-company recharges (Skandia America Corporation USA, case C-7/13) CJEU dismisses action in VAT grouping cases (Commission v. Ireland, case C-85/11 and others)

DENMARK VAT reclaim opportunity on portfolio management Right to deduct VAT depends on having a correct invoice

ITALY ‘Omitted payment’ penalties if head of VAT Group has not provided a bank guarantee

NETHERLANDS VAT invoicing requirements effective 1 January 2013 ‘Top holding companies’ can be part of a VAT group

POLAND Assistance services acquired by an insurance company to ensure medical care outside Poland should be VAT exempt Services provided by a broker to an insured in obtaining compensation from the insurance company should not be VAT exempt Damage liquidation services should be VAT exempt

SPAIN New invoicing obligations as from 1 January 2013 with direct impact on formalities of financial transactions The Spanish General Directorate of Taxation changes the interpretation on the portfolio management VAT exemption

UNITED KINGDOM VAT group representative member not entitled to refund Appeal court denies VAT recovery in corporate acquisition case Insurance broker network membership fees liable to VAT

EUROPEAN UNION VAT on Directors’ legal fees not recoverable by the company (Wolfram Becker, case C-104/12) The Court of Justice of the European Union (hereafter: CJEU) has held that legal fees invoiced to a company were not deductible because the lawyers were defending two directors who had been charged, in their personal capacity, with making illegal payments Background

Judgment

Wolfram Becker and another individual were directors of a construction company. The company was awarded a construction contract but shortly afterwards the two directors were accused of making illegal payments to secure information which enabled the company to submit its successful tender. The directors eventually paid penalties in respect of this action. The company and the directors had jointly engaged lawyers to defend the directors and the company sought to recover the VAT on those fees, the lawyers having addressed their invoices to the company. The tax authority refused the company's claim for deduction, considering that there was no direct link with the company's taxable business activities.

The CJEU rehearsed the case law: deduction of input VAT requires a direct and immediate link between the costs incurred by a business and either a particular taxable transaction or the business's taxable activities as a whole. In this case, the lawyers had been engaged to defend charges brought against the directors personally, even though charges could have been brought against the company. The costs could not, therefore, be regarded as having a direct and immediate link with the company’s overall activities. The CJEU acknowledged the causal link between the costs and the taxable construction contract - had it not been for that contract, the lawyers’ services would not have been needed. But that was not sufficient to establish the right to deduct. A direct and immediate link was required and that was absent.

In appeal, the national court was concerned that a right to deduct might exist because the lawyers' services would not have been acquired had it not been for the company's intention to secure the taxable construction contract. It therefore submitted several questions for a preliminary ruling about whether there was a right to deduct the input VAT on the legal fees by the company.

Consequently, the CJEU ruled that, in this case, ‘the supplies of lawyers’ services, whose purpose is to avoid criminal penalties against natural persons, managing directors of a taxable undertaking, do not give that undertaking the right to deduct as input tax the VAT due on the services supplied. Stan Beelen +31 88 792 45 24 [email protected]

Outsourced investment management services can be VATexempt (GfBk Gesellschaft für Börsenkommunikation mbH, case C-275/11) In this case concerning the VAT exemption for the management of ‘special investment funds’ the CJEU has held that advisory services provided by a third party to an investment management company are VAT exempt. Background

Implications

A German investment manager (GfBk) provided various services to its client, a fund manager. This investment manager made buy and sell recommendations within certain parameters set by the fund manager. Whilst responsibility for reviewing and approving those recommendations was retained by the fund manager, it effectively approved these, only rejecting recommendations if they breached agreed rules. In this particular case the fund manager did not undertake a separate asset selection process and did not have the capacity to do so.

This case appears to clarify and extend the current VAT exemption to sub-contracted services provided to investment managers. The CJEU has outlined criteria to assist to decide whether a service falls within the scope of the exemption for special investment funds. The primary characteristic seems to be that the service is ‘intrinsically connected’ to the management of the special investment fund.

The GfBk case clarifies the extent to which delegated fund management services can fall within the relevant exemption. The questions referred to the CJEU focus on whether an ‘advisory’ service can fall within the meaning of management, and, therefore, qualify as a VAT-exempt fund management service. Judgment The CJEU held that advisory services concerning investment in transferable securities, provided by a third party to an investment management company which is the manager of a special investment fund, are so intrinsically connected that they fall within the concept of ‘management of special investment funds’ for the purposes of the exemption laid down in that provision, even if the third party has not acted on the basis of a mandate.

What now? This case will potentially apply to any special investment fund which receives outsourced services which used to be subject to VAT. Businesses making or receiving such supplies are advised to review whether such supplies are in scope of the VAT exemption for management of special investment funds now. Third party service providers should consider the services that they provide in order to determine the appropriate VAT liability. This applies in particular where such services are provided to recipients from non-EU providers and therefore VAT has been accounted for under the reverse charge mechanism. Stan Beelen +31 88 792 45 24 [email protected]

Management of ‘defined benefit’ pension scheme not VAT exempt (Wheels Common Investment Fund Trustees Ltd, case C424/11) The CJEU has held that the management of a ‘defined benefit’ pension scheme (an investment fund pooling the assets of a retirement pension scheme) is not exempt from VAT as it does not fall within the scope of the exemption for special investment funds. Background Wheels Common Investment Fund Trustees Ltd (hereafter: Wheels) is the trustee of a fund that, for investment purposes, pools the assets of occupational pension schemes established by an employer. Each scheme provides pensions to former employees, calculated by reference to final pay and length of service. During their employment, the employees pay fixed contributions which are deducted from their salary. The employer also makes contributions sufficient to ensure funding for the cost of providing pension benefits. Wheels engaged a fund manager to supply fund management services to it. In accordance with the UK VAT legislation, it charged VAT on those services. The challenge to the VAT treatment of these investment management services followed the release of the judgment in the CJEUcase JP Morgan Claverhouse Investment Trust (case C-363/05). In 2008 Wheels took the position that ‘special investment funds’ should also include pension funds, and the exemption for the management should extend to the management of pension scheme assets. Consequently, Wheels’ supplier submitted a claim for overpaid VAT to Her Majesty’s Revenue & Customs (hereafter: ‘’HMRC’’) on the basis that the investment management services were exempt under the same exemption for investment management services supplied to ‘special investment schemes’. HMRC duly rejected the claim, Wheels appealed against that decision and in 2011 the First-tier Tribunal referred questions to the CJEU. Judgment The CJEU has held that Defined Benefit (DB) pension schemes (as at issue in the main proceedings) cannot be regarded as a special investment fund in respect of the exemption.

In that respect the CJEU considered that DB pension schemes were not open to the public – instead, they are an employmentrelated benefit that an employer only grants to its employees complying with its legal obligations towards his employees. Moreover, the members of such schemes do not bear the risks from the management of the fund. The CJEU also held that fiscal neutrality does not require the management of DB pension funds to be exempt. DB pension schemes are not sufficiently similar to special investment funds (the management of which is exempt). Neither did the CJEU consider that the employer is in a position analogous to an investor in a special investment fund. Implications Managers and pension funds are advised t0 review any claims to see whether there are any actions that need to be taken (particularly where claims have been put on hold pending the CJEU decision in Wheels). Unfortunately the questions were limited to Defined Benefit schemes – the answers might have been very different in the context of ‘Defined Contribution’ schemes. Alternative arguments are available in relation to the VAT liability of pension fund management, and it is possible that an exemption will ultimately be available for certain types of pension fund management, as there is ongoing litigation concerning pension funds e.g. PPG Holdings, case 26/12 and ATP Pension Service A/S, case 464/12. Stan Beelen +31 88 792 45 24 [email protected]

Advocate General concludes that pro-rata calculation should exclude out-of-country income (Le Crédit Lyonnais, case C-388/11) The Advocate General has rejected the requirement to include, in a business’s partial exemption pro rata calculation, income from other Member States and third countries. Background Le Crédit Lyonnais had sought to include interest charged to its establishments outside France in its partial exemption calculations. The French tax authority resisted this on the basis that the establishments were part of the same corporate entity Le Crédit Lyonnais sought to counter this by including, instead of the interest charged, the income generated by its establishments outside France in its partial exemption calculations. The French Conseil d’Etat has asked the CJEU whether and how foreign turnover may be taken into account for the partial exemption calculation of the pro rata deduction in case of a French company with overseas branches. The referred questions are whether: •

The entire ‘EU’ turnover of the company should be taken into account for the recovery position of the head office and each of the branches;



The same solution applies to branches outside the EU, taking into account that banking and financial transactions to a recipient outside the EU give right to deduct VAT ;



The answer to the first questions may vary from Member State to Member State, taking into account the options that the latter have with respect to setting up business sectors ;



If the answer to one of the two first questions is positive a.

Should the ‘worldwide pro rata’ apply restrictively to expenses incurred by the head office to its branches?

b. Should the foreign turnover be taken into account in accordance with the rules of the countries of establishment of the head office and of the branch? Opinion AG The Advocate General (hereafter: AG) has concluded that the relevant articles in the VAT Directive must not be interpreted as meaning that they do not oblige the Member States to provide that, in calculating the pro rata deduction of a society established in their territory, the income of branches in other Member States or third countries must be taken into account. Implications Businesses in the EU are advised to check whether according to national legislation income of branches in other Member States or third countries has to be taken into account for the partial exemption. Although this opinion of the AG is not binding for Member States, it is likely that the CJEU will follow the AG’s conclusion. Stéphane Henrion +33 1 56 57 41 39 [email protected]

Questions to CJEU on cross-border inter-company recharges (Skandia America Corporation USA, case C-7/13) This referral from Sweden concerns whether supplies made within a VAT group by a branch of an overseas company, using supplies received from third parties at its overseas establishment, are not to be disregarded and require the overseas entity to independently register and account for VAT in Sweden. Background

Referred questions

In this case a US parent company buys software and software maintenance services which it supplies to the Swedish branch which is VAT registered within the Swedish VAT group.

In this respect the Swedish court asked the following questions to the CJEU:

The costs for these supplies are recharged to the Swedish branch at cost +5% for transfer pricing purposes. The Swedish branch has staff and resources, and adds value to those services which it supplies on to other VAT group members. The Swedish tax authority has registered the US head office and assessed VAT on basis that the head office and branch are to be treated as separate entities, because the branch is in the VAT group and the branch creates a Swedish establishment from which the services are supplied.



Do supplies of externally purchased services from a company’s main establishment in a third country to its branch in a Member State, with an allocation of costs for the purchase to the branch, constitute taxable transactions if the branch belongs to a VAT group in the Member State?



If the answer to the first question is in the affirmative, is the main establishment in the third country to be viewed as a taxable person not established in the Member State within the meaning of the VAT Directive, with the result that the purchaser is to be taxed for the transactions?

Jan Huusmann Christensen +45 3945 9452 [email protected]

CJEU dismisses action in VAT grouping cases (Commission v. Ireland, case C-85/11 and others) The CJEU has supported the Advocate-General’s opinion that EU legislation does not preclude the inclusion of non-taxable persons such as passive holding companies and dormant companies in VAT groups, and has dismissed the European Commission’s action. Background Under Irish law it is possible that two or more closely related entities form a VAT group to be treated as a single taxable person. The close relationship is financial, economic and organisational. At least one of the group members must be a taxable person in its own right, but the other(s) need not be.

The European Commission brought a case against Ireland, claiming that the letter and spirit of the VAT Directive clearly requiring that all individual members of a VAT group are taxable persons. Judgment The CJEU accepted the Irish defence and rejected the Commission’s suit. Contrary to the Commission’s view, the wording of the VAT Directive does not restrict membership of VAT groups to taxable persons.

It applies to ‘persons’ rather than ‘taxable persons’ and it does not require that those persons would have to be taxable persons in their own right to be a member of a VAT group. Other infringement procedures This is the first judgment in a number of infringement proceedings against Member States about inclusion of non-taxable persons in a VAT group. In the other infringement proceedings the CJEU has held - with a further six judgments in the same vein - in favour of Member States that the non-taxable persons can be included in a VAT group as well.

The CJEU case references are C-480/10 (Commission v. Sweden), C-65/11 (Commission v. Netherlands), C-74/11 (Commission v. Finland), C-86/11 (Commission v. UK), C-95/11 (Commission v. Denmark) and C-109/11 (Commission v. Czech Republic). Stan Beelen +31 88 792 45 24 [email protected]

DENMARK VAT reclaim opportunity on portfolio management Following the CJEU’s judgment in the Deutsche Bank case (C-44/11) the Danish VAT practice regarding portfolio management services will be changed with effect from 1 July 2013. VAT and payroll tax (lønsumsafgift) liabilities for past periods can be reopened if the former practice has been unfavourable for the taxpayer. On 19 July 2012, the CJEU issued a judgment in case C-44/11, Deutsche Bank AG, which concerned the VAT treatment of portfolio management services to client investors. Those client investors instructed Deutsche Bank to manage securities, at its own discretion and without obtaining prior instruction from them, in accordance with the investment strategy variants chosen by them and to take all measures which seemed appropriate for those purposes. The bank was thus entitled to dispose of the assets (securities) in the name and on behalf of the client investors. The clients paid an annual fee amounting to 1.8% of the value of the managed assets. The CJEU concluded that these services, i.e. taking decisions on the purchase and sale of securities and implementing those decisions by buying and selling the securities, are to be regarded as one single VAT taxable service.

Under the former Danish practice, such services were exempt from VAT. However, according to a recent announcement from the tax authorities, this practice will be changed from 1 July 2013, as a result of which the following services will be regarded as one single VAT taxable service: •

where a company on behalf of a client at its own discretion makes a decision regarding the purchase and sale of securities, and;



where a company implements these decisions in the name and on the account of a client.

The services in question will still be exempt from VAT when supplied to an investment fund.

If the former practice has been unfavourable for a taxpayer, it is possible to request reopening the VAT and payroll tax (lønsumsafgift) liabilities for past periods. Such request must however cover all tax periods that can be reopened, meaning that a company is not allowed to seek the reopening of selected periods only. Tax periods can be reopened 3 years back from the announcement of the CJEU judgment (i.e. beginning from 1 July 2009).

Taxpayers, in particular Danish portfolio management companies with foreign investor clients, may have an input VAT and payroll tax claim against the tax authorities, although in these particular circumstances, the question of a consequent Danish output VAT liability would not arise. Reopening requests will have to be filed by 19 June 2013 at the latest. Jan Huusmann Christensen +45 3945 9452 [email protected]

Right to deduct VAT depends on having a correct invoice In a recent case from the Danish National Tax Tribunal (hereafter: Tribunal), a buyer was not allowed to deduct input VAT because the purchase invoice did not comply with the formal requirements. Although the Tribunal’s decision is perhaps questionable, it nevertheless highlights a risk that the right to reclaim VAT can be challenged on formal grounds alone. The case in question concerned two Danish companies which had traded with each other over a long period of time. The seller charged VAT on its supplies, which was also specified on the invoices issued. Other than the seller’s VAT registration number being crossed off on some invoices, the formal invoice requirements were fulfilled. However, the seller was in fact not registered for VAT and did not pay the VAT to the tax authorities. At the same time, the VAT was undoubtedly charged correctly, meaning that the buyer should have been able to reclaim the input VAT. The Tribunal concluded, however, that the buyer can only reclaim input VAT if it has an invoice that complies with all formal requirements. As the supplier’s VAT number was crossed off on some invoices, the buyer was not granted the right to reclaim input VAT. In the Tribunal’s opinion, the buyer should have noted that some invoices lacked the

VAT registration number and should have investigated this. The buyer would then have discovered that the seller was not registered for VAT and thus did not pay any VAT to the tax authorities. However, the Tribunal's decision is questionable, as the buyer’s right to deduct input VAT is a basic right that, as a starting point, cannot be limited. A mere formality, such as the lack of the seller’s VAT registration number on the invoice, should not cause the buyer to lose the right to deduct input VAT. Nevertheless, the Tribunal’s decision unfortunately means that even between two Danish companies, there is a risk of a buyer losing the right to deduct input VAT if no formally correct purchase invoice can be presented to the tax authorities. Companies are advised to focus on receiving compliant invoices from their suppliers. Jan Huusmann Christensen +45 3945 9452 [email protected]

ITALY ‘Omitted payment’ penalties if head of VAT Group has not provided a bank guarantee The Supreme Court has held that without the submission of a bank guarantee supporting the VAT offsetting procedure between VAT credits and VAT debits of companies participating in a VAT group, penalties for omitted payments would be assessed. Italy implemented a ‘VAT grouping’ procedure on 13 December 1979. According to the rules on VAT grouping, the parent company carries out the VAT settlement on behalf of the VAT group. This means that VAT credits and VAT debits of the companies participating in the VAT group are offset and a single payment – if any- is made by the parent company. Moreover, according to a Ministry Decree dated 13 December 1979, the transfer to the parent company of the VAT credit within the VAT grouping and the remaining VAT group credit at the end of the year (if any) must be supported by a guarantee. The Supreme Tax Court’s decision, issued on 3 April 2013, states that without the submission of the bank guarantee supporting the VAT offsetting procedure between VAT credits and VAT debits of the companies participating in VAT groups, penalties for omitted payments would be assessed. The Court ruled that in case a VAT credit of one company participating in a VAT group is transferred to the VAT

group and offset with VAT debits of other companies, the payment of the VAT group debit is not fulfilled if there no guarantee has been provided by the parent company. In the decision at issue, the Court stated that: •

the guarantee is a mandatory requirement for the offsetting procedure within the group;



according to the provisions in a Ministry Decree dated 13 December 1979, if the guarantee is not provided, the amount equal to the offset VAT credit that was not guaranteed must be repaid to the Italian tax authorities within the deadline for the submission of the annual VAT return;



penalties for omitted payments (i.e. 30% of VAT) are due.

Alessia Angela Zanatto +39 02 91605728 [email protected]

DID YOU KNOW? ITALY Financial operators in Italy annually have to submit data to the Italian tax authorities related to certain financial arrangements with customers during a calendar year. The operating rules, deadlines and instructions have recently been defined by the Italian tax authorities. As regards the types of financial arrangements, the following is – amongst others - included in the operating rules:  Bank account;  Securities and shares account;  Investment funds;  Portfolio;  Derivatives;  Credit/debit cards;  Pension funds;  Guarantees;  Loans. Data related to the financial arrangements have to be reported to the Italian tax authorities mainly to enable the Italian tax authorities to carry out tax inspections. For example, for 2012, information to be reported in respect of bank accounts includes the following:  accounting balance at December 31, 2011;  accounting balance at December 31, 2012;  total amount credited during 2012;  total amount debited during 2012. Specific IT infrastructure has been defined for this kind of communication. The communication has to be submitted to the Italian tax authorities before April 20 with reference to the previous calendar year. However, for 2011 and 2012, the deadlines are, respectively, October 31, 2013 and March 31, 2014.

NETHERLANDS VAT invoicing requirements effective 1 January 2013 From 1 January 2013, new invoicing requirements are applicable in the EU. The Netherlands anticipated these changes at an early stage so the changes are minor. However, several aspects still merit attention. Invoicing Generally, businesses issue invoices for their supplies of goods or services. However, subject to certain requirements, your customers or third parties may draw up and issue invoices on your behalf (socalled ‘self-billing’ or ‘third party billing’).

As the supplier, you remain responsible for the those billing methods and their consequences. The invoices must always satisfy the legal invoicing requirements. Deduction of input VAT in the VAT return is only allowed for invoices that meet these statutory requirements.

As from 1 January 2013, businesses have been given an extra day to issue invoices in time. Until year-end 2012, an invoice had to be issued within 15 days of the month following that in which the chargeable event occurred. It is now allowed to issue the invoice even on the 15th day of the month following the chargeable event. For continuous supplies it is still possible to issue one invoice per year. Additionally, as from 1 January 2013 invoices must be issued for agreed prepayments. That invoice must be issued before the prepayment falls due. Which invoicing rules apply? The new rules for determining the jurisdiction that governs invoicing correspond to the rules that determine where a supply is deemed to be made for VAT purposes. There are two exceptions: •

if the supplier is not established (and has no permanent establishment) in the EU member state in which the supply of goods and services is deemed to be made and the liability for the VAT payment is shifted to the customer; and



if the supply of goods and services is deemed to be made outside the European Union.

In these cases, the invoicing rules of the country of establishment of the business that issues the invoice are applicable. For businesses that are not established in the EU and that make a supply deemed to be made within the EU, the invoicing rules apply of the Member State where the supply of goods or services is deemed to be made – even if the liability for payment of the VAT is shifted to the customer. Compulsory contents of an invoice for certain transactions In a number of situations, businesses have to include an indication relating to the nature of the transaction, or a reference to the specific situation, on the invoice. That is the case in situations where: •

the recipient of the supply issues the invoice;



an exemption applies;



an intra-Community supply at the 0% rate is carried out;



the liability for the payment of the VAT is shifted to the recipient;



a ‘new means of transportation’ is supplied;



the special scheme for travel agencies applies; or



the special scheme for second hand goods, works of art, collectors’ items and antiques applies.

Under Dutch law, these references are only mentioned in Dutch. However, the explanatory notes of the European Commission to the European Invoicing Directive indicate that there are no language restrictions to these references but that in case of an audit, a translation can be requested. Regardless, the use of another language cannot lead to a rejection of deduction of the input VAT mentioned on the invoice. Simplified invoices Under certain conditions, businesses are allowed to issue simplified invoices, for example in cases where the invoiced amount does not exceed 100 Euros. These invoices must at least include the following information: the date of issue of the invoice, the identification of the supplier, the identification of the type of the goods or services supplied, and the VAT amount payable. Electronic invoicing and archiving As from 1 January 2013, electronic invoices and paper invoices are treated the same. The former requirements for electronic invoices, and issuing and storing them, have thus been eased. However, the business still has to guarantee the authenticity of the origin, the integrity of the content and the legibility of the invoice. Businesses are free in their choice of where and how to store and archive invoices. However, if the tax authorities request these invoices for an audit, the business is obliged to supply them within a reasonable time. In principle, there is an archiving obligation of 7 years. Stan Beelen +31 88 792 45 24 [email protected]

‘Top holding companies’ can be part of a VAT group The CJEU decided that the Dutch policy (the ‘Holding Decree’) allowing VAT grouping for holding companies that perform management and policy-making activities but do not perform any activities for consideration, is in line with EU VAT law. This result does not come as a complete surprise, because the CJEU had already held - on the same grounds - that similar Irish rules were also in line with the EU VAT system (with reference to item 6). However, because the current Dutch VAT rules only allow taxable persons and holding companies that perform management and policy-making activities

to be included in a VAT group, this ruling does not automatically imply that other non-taxable persons (e.g. other types of holding companies or directors and major shareholders) can be included in Dutch VAT groups. Stan Beelen +31 88 792 45 24 [email protected]

POLAND Assistance services acquired by an insurance company to ensure medical care outside Poland should be VAT exempt Assistance services acquired by a Polish insurance company in order to ensure comprehensive medical care outside Poland in the event of an accident of an insured should be VAT exempt. The case examined by the Supreme Administrative Court concerned the VAT treatment of assistance services. In the regular conduct of its business, the insurance company concludes insurance agreements with clients leaving Poland that include assistance services. Such assistance consists of comprehensive medical care outside Poland in the event of an accident. To that end, the insurance company cooperates with specialized foreign entities rendering full assistance service. Under the agreements, service providers are responsible for maintaining a client support centre and taking any action necessary. Depending on the circumstances, the service provider may perform all or only some of the required actions.

According to the Court, assistance services rendered by the providers to the insurance company should be treated as an element of the insurance service supplied. As a result, they should be treated as VAT exempt. Moreover, in the Court’s opinion, the Polish legislator extended the scope of the VAT exemption for insurance services in the VAT Directive. Review of the VAT treatment of particular payments within assistance agreements is necessary in order to identify whether charges arising from contracts may benefit from VAT exemption. Marcin Chomiuk +48 22 523 4807 [email protected]

Services provided by a broker to an insured in obtaining compensation from the insurance company should not be VAT exempt A service provided by a broker to an insured (i.e. conducting the procedure with the insurance company to obtain compensation) should not be VAT exempt. The Supreme Administrative Court has examined a case concerning the VAT treatment of services rendered by a broker to an insured. The insurance broker provides intermediary services between the insurance company and the customers. A key element of the service is assisting the insured in the procedure with the insurance company to obtain compensation. The insured gives the broker the necessary powers of attorney for that purpose. The broker is remunerated in the form of a commission paid by the insured.

According to the Court, this service should not be considered an intermediary insurance service, and thus should be considered as a VAT taxable service. Rather, the broker’s activities as described above should be considered assistance to the insured, not to the insurance company. Hence, it is more similar to a service rendered by a legal advisor. Marcin Chomiuk +48 22 523 4807 [email protected]

Damage liquidation services should be VAT exempt Damage liquidation services should be treated as an element of the insurance service being required and necessary to provide this service and thus this service is VAT exempt The Supreme Administrative Court examined a case concerning the VAT treatment of damage liquidation services. The company provides damage liquidation services, including: determining the causes and circumstances of insurance events, determining the amount and extent of the damage and the compensation. According to the Court, the above service should be treated as an element of the insurance service being required and necessary to provide this service. As a result, such service should be treated as VAT exempt. Moreover, in the Court’s opinion, the Polish provision stipulating VAT exemption to services being the element of the exempt service was

implemented incorrectly, as it provides a wider range than the relevant article in the VAT Directive. However, according to CJEU rulings, where a European regulation was implemented incorrectly by a Member State and the domestic provision gives the taxpayer an advantage, such taxpayer may benefit from this domestic provision. A review of VAT treatment of damage liquidation services is necessary to identify whether charges are exempt from VAT. Marcin Chomiuk +48 22 523 4807 [email protected]

SPAIN New invoicing obligations as from 1 January 2013 with direct impact on formalities of financial transactions Spain drops the obligation to issue an invoice in support of VAT exempt financial and insurance transactions. A new Spanish Royal Decree on invoicing, effective as from 1 January 2013 introduces some significant changes to the invoicing requirements. Under the previous invoicing legislation, issuing invoices was compulsory in B2B situations to support VAT exempt financial / insurance transactions, regardless of the place of supply of the service for VAT purposes. That legislation also provided some exceptions to this obligation. For certain transactions and financial expenses it was allowed to issue simplified invoices or other documents (public documents issued by public notaries, bank statements, etc.) under certain conditions. According to the new legislation on invoicing, even in a B2B situations no invoice will need to be issued to support exempt financial / insurance transactions, unless these take place within the Spanish VAT territory or in another EU Member State and are subject to VAT. The way local legislation has implemented European legislation in this respect may create some confusion among taxpayers that provide exempt insurance and financial services that are located in an EU Member State different from where the supplier is established. The Explanatory Notes on the Invoicing Directive, published

in October 2011, do not help much in this particular case. The Explanatory Notes only explain that the “invoice request” option can be used for domestic supplies and supplies outside the EU, but not in respect of B2B transactions with other Member States. Further development of recently approved local legislation on invoicing is expected and ideally also some Resolutions or Rulings that clarify invoicing obligations on financial transactions. Implications The non-invoicing rule for exempt financial / insurance transactions currently creates some insecurity for taxpayers providing these cross-border B2B exempt supplies. It may indicate that the supplier of these kinds of financial services is required to be aware of the VAT treatment applicable in the EU Member State where that transaction is considered to have been supplied. Miguel Blasco +34 9 1568 4798 [email protected] Yolanda Cano Guerrero +34 915 685 543 [email protected]

The Spanish General Directorate of Taxation changes the interpretation on the portfolio management VAT exemption A financial company’s integrated service of portfolio management and the purchase and sale of securities is not exempt from VAT. The Spanish General Directorate of Taxation (hereafter: SGDT) had established a criterion, based on a ruling in the year 2004, on the VAT treatment applicable to portfolio management services. In this ruling the discretionary portfolio management service was understood as exceeding a mere informative or advisory activity about securities, granting the agent a large power to buy, subscribe to or sell the relevant securities being managed. Hence these should be considered as VAT exempt services according to Spanish VAT law. Over time this criterion has been reiterated by the SGDT in multiple rulings. In the Deutsche Bank-case (C-44/11) of 19 July 2012 the CJEU followed a different approach in analysing this type of services and concluded quite the opposite. The CJEU held that a service comprised of securities analysis and portfolio supervision on the one hand and purchase and sale of those securities on the other hand constitutes a single composite supply, and it would be artificial to split. This being a single service, and exemptions being exceptions to main VAT taxation rule, the CJEU ruled that such a discretionary, portfolio management service is not exempt from VAT. On the back of this case the SGDT issued a tax ruling on 2 January 2013 to adjust their

own criterion. The SGDT reproduced the CJEU argumentation in defending the changed criterion, concluding that a discretionary portfolio management service is not exempt from VAT. Furthermore, the SGDT reiterated that rulings are binding on the Administration and stressed that, while legislation had not been changed, any taxpayer applying for the ruling will be subject to the revised criterion. The main impact for financial companies performing such portfolio management services relates to exploring opportunities to improve their VAT recovery rates. A commercial impact also needs to be considered in terms of potential increase of agreed prices. Furthermore, an analysis of the impact in VAT recovery rates of financial institutions as to reach either an increase of general pro rata or other solutions such as the implementation of different sectors of business activity must be made. Miguel Blasco +34 9 1568 4798 [email protected] Yolanda Cano Guerrero +34 915 685 543 [email protected]

UNITED KINGDOM VAT group representative member not entitled to refund The issue in this case was the repayment of overpaid VAT when there had been changes in the corporate structure and ownership of the trading entity that had overpaid VAT. The First-tier Tribunal (hereafter: FTT) held that the representative member of the group was not entitled to make a claim for overpaid output tax after the VAT group had been disbanded. The FTT also considered time limitation issues and whether rights to repayment of overpaid output tax were assigned.

Background The Appellant was the representative member of a VAT group from 1973 until the disbandment of that VAT group in 2009. The Appellant owned and operated bingo halls and cinemas. In 1990, the Appellant undertook a corporate reorganisation and transferred certain businesses to another company ‘Carlton’. Carlton was included in the Appellant’s VAT group. In 1997, the Appellant transferred the shares in Carlton to its parent company and at that time Carlton remained in the Appellant's VAT group. In 1998 the parent company sold the shares in Carlton to a third party. The VAT group was disbanded entirely in 2009. The Appellant received repayment of ‘Fleming claims’ as representative member of the VAT group. Those claims included amounts which related to the activities of Carlton. The tax authority, HMRC, made repayment in 2009 but in 2010 HMRC informed the Appellant that the repayment was properly due to Carlton and assessed for the amounts repaid. The Appellant appealed. In terms of the process of making the original Fleming claims, it appears from the Tribunal decision that the Fleming claims were actually made by Carlton and that the Appellant had not itself made any voluntary disclosures in respect of the Fleming claims that were actually repaid to it by HMRC and which were later assessed by HMRC.

Thus the issues in this appeal concerned whether the Appellant’s claims were timebarred and whether the Appellant was entitled to receive the repayments originally made by HMRC. Judgment The FTT considered that in relation to the time limitation question, the Appellant could not rely upon the claims made by Carlton. Carlton had not made those claims on behalf of the Appellant. On the first issue therefore, the FTT held that the Appellant was time barred by the statutory time limitation. In relation to whether the right to reimbursement of the overpaid tax had been assigned or transferred to Carlton by the terms of the various business structuring and contractual agreements, the FTT considered that those rights had been transferred. The FTT also noted that whatever rights the Appellant may have had, any rights were removed by the disbandment of the VAT group. The FTT observed that the Appellant was not the ‘generating taxpayer’ for the period from 1 April 1990 to 3 December 1996 and that the Appellant had not represented Carlton for any purpose since Carlton left the VAT group in 1998. Jamie Randell +44 207 213 8253 [email protected]

Appeal court denies VAT recovery in corporate acquisition case The Court of Appeal (hereafter: CA) has rejected to permit recovery of VAT on advisory costs incurred before the company which incurred them joined the Taxpayer's VAT group. At the relevant date when the costs were incurred, it had no economic activity and so at that point, there was no direct and immediate link to the taxable supplies of the VAT group to justify recovery. This case essentially concerns whether a bid vehicle was entitled to recover VAT on advisory costs incurred before it was admitted to the bid target company's VAT group. In summary, the CA was asked to consider the entitlement of a holding company, ADIL, to recover VAT incurred on professional services supplied to it in

connection with its successful takeover of BAA, the well-known airport business. Following the takeover, ADIL joined the BAA VAT Group which then sought to recover the input VAT that had been incurred by ADIL.

The questions in this case were essentially: 1) whether ADIL had been carrying on an economic activity at the time the input VAT was incurred; and 2) whether there was a direct and immediate link between the professional services supplied to ADIL and any onward taxable supplies. Both the FTT and the Upper Tribunal (hereafter: UT) agreed that ADIL had been carrying on an economic activity at the time the input VAT had been incurred. However, the UT, overturning the decision of the FTT, held that the supplies to ADIL did not have a sufficiently direct and immediate link with the taxable supplies of the BAA VAT Group to be recoverable by it. Judgment The CA disagreed with both the FTT and the UT held that ADIL was not in fact carrying on an economic activity at the time the disputed input VAT was incurred. At the time the costs were incurred, ADIL's only proven intention was to take over BAA by acquiring the shares in it.

The CA also held that there was no sufficiently direct and immediate link between the professional services supplied to ADIL and any future supplies subsequently made by either ADIL or the BAA VAT Group. Although costs incurred by a holding company could in principle form part of the general overheads of a taxable business, with the necessary direct and immediate link, the CA did not consider this to be the case for ADIL and BAA. The professional services were supplied only in connection with the takeover of BAA. ADIL itself was making no taxable supplies, had no intention to do so, and the professional services were in no way connected with the onward taxable supplies of the BAA VAT Group as a whole. In finding that there were no taxable supplies that the input VAT could be linked to, the CA was heavily influenced by the FTT's finding of fact that ADIL had no intention at the time of the takeover to make any future taxable supplies. Jamie Randell +44 207 213 8253 [email protected]

Insurance broker network membership fees liable to VAT The FTT has decided that membership fees paid by insurance brokers to the organizer of a brokerage network are liable to VAT at the standard rate. Background The Appellant acts as an intermediary in the arranging of contracts of insurance. Essentially, it has relationships with insurance providers on the one hand, and with insurance brokers on the other. The brokers are fairly small businesses which would not be able to obtain the more favorable terms of business which insurers will offer to larger brokers who can bring them larger volumes of business. So the Appellant has developed relationships with about 180 of these smaller businesses and acts as intermediary on their behalf. In that way, it has been able to negotiate more favorable terms, in particular higher commissions.

The Appellant's other source of income, apart from commissions received from the insurers, is the membership fees paid to it by the network's brokers. The dispute in this case concerned only the services provided by the Appellant to the brokers in return for these membership fees, and whether they constituted the services of a broker or agent providing the services of an insurance intermediary for the purposes of the exemption. The FTT noted that the tax authority, HMRC, had ruled that the commissions received by the Appellant were exempt and were not an issue in this case, although Counsel for HMRC suggested that HMRC might review its position.

HMRC's view was that the Appellant was carrying on a business of providing promotional services to the insurers and aggregation services to the brokers, i.e. the benefits to the brokers were enhanced commissions and wider access to insurers' products because of the greater buying power created by the network. HMRC considered that these services did not amount to an intermediary service. In 2011, HMRC issued a ruling to that effect and compulsorily registered the Appellant for VAT with effect from 2005. Judgment The FTT had to decide whether the services could be properly described as the business of bringing together insurers and those seeking insurance, the essential characteristic of an insurance broker or an insurance agent, as opposed to providing insurance-related services which fell short of the essential characteristics that denote services provided by an insurance agent or insurance broker because they are incidental to the insurance transactions that result. In particular: there must be a relationship with both the insurer and the insured, but the relationship could be direct or indirect and did not require a contractual relationship. The FTT held that, the Appellant was too far removed from the conduct of any individual transaction to be described as a broker or agent. The Appellant's services certainly assisted the brokers to do business with the insurers but the FTT regarded these as preparing the ground to enable others to intermediate, and were too remote from the insurance transactions to being the services of an insurance broker or insurance agent. In respect of the brokers, the core obligation was to grant access to the insurers and their products on favorable terms.

To constitute the services of an insurance broker or insurance agent, the Appellant would need to participate in the intermediary services, but the services were more akin to support services than acts of intermediation in themselves. An essential characteristic of an insurance broker or insurance agent is that he is engaged ‘in the business of putting insurance companies in touch with potential clients.’ In this case, the Appellant did not participate in the chain but made arrangements which facilitated the creation of such a chain between the insured and the insurer. The FTT therefore held that the services which the Appellant provides to the brokers were not services related to insurance transactions which are performed by an insurance broker or insurance agent in respect of the VAT exemption. Jamie Randell +44 207 213 8253 [email protected]

Contacts 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

PwC contacts Hungary

Portugal

Koenraad de Bie tel: +32 2 710 43 14 [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]

Alessia Angela Zanatto tel: +39 02 91605728 [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]

Evelyn G Lam tel: +1646 204 1094 [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 help organisations and individuals create the value they’re looking for. We’re a network of firms in 158 countries with more than 180,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. © 2013 PricewaterhouseCoopers Belastingadviseurs N.V.(KvK 34180284). All rights reserved.