The VAT treatment of pension funds is an ongoing topic of discussion in Dutch VAT practice with several cases pending before the courts and some inconsistencies in decided cases. Pension funds and their asset managers believe they are similar to collective investment funds, which would allow management services to be exempt from VAT. This article looks at a 14 March 2024 opinion of Advocate General Kokott of the Court of Justice of the European Union (CJEU) involving the VAT treatment of six Dutch pension funds, as well as current Dutch policy in this area. A fund that has the same characteristics as an undertaking for collective investment in transferable securities (UCITS) or is sufficiently comparable to a UCITS to be in competition with it, is considered a special investment fund that qualifies for the exemption. The AG opined in the joined cases that the pension funds are not sufficiently comparable to UCITS and thus do not qualify for the VAT exemption for asset management services.
The Dutch Supreme Court ruled in 2016 that a pension fund that executed a benefit agreement could not be equated with a UCITS because the risk borne by the beneficiaries was insufficient to equate it with the risk borne by beneficiaries of a collective investment fund and thus the pension fund cannot benefit from the VAT exemption for fund management. Indeed, the amount of pension benefits was determined based on years of service and average earnings. According to the Supreme Court, the risk that pension entitlements and pensions payments are not indexed or are being reduced is of a different order than the risk of disappointing investment results for participants in a collective investment fund.
However, it has become clear in recent years that participants do face risk under such benefit agreements: pension funds have had to reckon with lower expected returns, forcing them to increase pension contributions or reduce pensions.
The AG briefly discusses fiscal neutrality. According to the Dutch State Secretary of Finance, the management of an individual defined contribution plan is exempt from VAT as this plan is regarded as a special investment fund even though it is not a UCITS. According to AG Kokott, such a scheme is not comparable to an occupational pension fund for several reasons. We suspect that the AG is particularly concerned with the difference in investment risk, although it is also mentioned that the defined contribution plan is a voluntary option for the employee to supplement pension benefits. In fact, participation in the industry pension fund is mandatory for employees and results in a guaranteed pension commitment. A reliance on being "similar to other funds that are not UCITS but are nevertheless considered mutual funds by the member state" thus also fails.
Background
Dutch pension funds often operate average earnings schemes (benefit agreements). According to the current policy of the State Secretary of Finance, pension funds executing a benefit agreement (average earnings or final earnings scheme) do not qualify as a collective investment fund, because when operating these schemes, the pension beneficiaries do not bear the risk of the investments.The Dutch Supreme Court ruled in 2016 that a pension fund that executed a benefit agreement could not be equated with a UCITS because the risk borne by the beneficiaries was insufficient to equate it with the risk borne by beneficiaries of a collective investment fund and thus the pension fund cannot benefit from the VAT exemption for fund management. Indeed, the amount of pension benefits was determined based on years of service and average earnings. According to the Supreme Court, the risk that pension entitlements and pensions payments are not indexed or are being reduced is of a different order than the risk of disappointing investment results for participants in a collective investment fund.
However, it has become clear in recent years that participants do face risk under such benefit agreements: pension funds have had to reckon with lower expected returns, forcing them to increase pension contributions or reduce pensions.
Questions raised
Several occupational pension funds initiated proceedings before the District Court Gelderland because they consider the investment risk condition to qualify for the VAT exemption for collective asset management to be interpreted too strictly. The District Court was unable to deduce from CJEU jurisprudence whether this is the case, so the court referred the case to the CJEU. In particular, the District Court asks whether it is sufficient that the collective participants assume the investment risk, how great the individual risk must be and whether it is relevant that other factors also determine the amount of the pension (e.g., the number of years of pension accrual, salary level, actuarial interest rate, etc.). The CJEU was also asked to rule on whether the tax neutrality principle requires funds be examined as to whether they are comparable to UCITS or comparable to other funds that are not UCITS funds but are considered special investment funds by the EU member state.AG opinion
AG Kokott begins her opinion by examining whether the pension funds are comparable to investment funds within the meaning of the EU UCITS Directive. For several reasons, she concludes they are not. For example, occupational pension funds are not publicly accessible, there is no redemption or repurchase obligation (or this is only possible in exceptional cases) and the participants in the funds on the basis of a benefit agreement (also known as a "defined benefit" agreement) do not assume an investment risk comparable to participants in a collective investment fund within the meaning of the UCITS Directive. The latter seems to be the most decisive factor. AG Kokott acknowledges that there is some risk, for example, because favourable or unfavourable investment results can lead to a high or low coverage ratio of a fund, which can eventually lead to an indexation of pension benefits. However, a guaranteed pension commitment remains, so the investment risk is not comparable to that of a collective investment fund.The AG briefly discusses fiscal neutrality. According to the Dutch State Secretary of Finance, the management of an individual defined contribution plan is exempt from VAT as this plan is regarded as a special investment fund even though it is not a UCITS. According to AG Kokott, such a scheme is not comparable to an occupational pension fund for several reasons. We suspect that the AG is particularly concerned with the difference in investment risk, although it is also mentioned that the defined contribution plan is a voluntary option for the employee to supplement pension benefits. In fact, participation in the industry pension fund is mandatory for employees and results in a guaranteed pension commitment. A reliance on being "similar to other funds that are not UCITS but are nevertheless considered mutual funds by the member state" thus also fails.
Comments
The CJEU now must issue its decision in the joined cases. If the CJEU follows AG Kokott’s opinion, it appears that the management of (occupational) pension funds offering a defined benefit scheme to employees will not be exempt from VAT. This means that VAT would have to be charged on management services provided to such pension funds. If the pension fund does not have a full input tax deduction, this will lead to an increase in costs. On the other hand, by taxing management services, the manager's input tax deduction right remains intact.
Several cases are pending in the Netherlands on a pension fund's right of deduction. The District Court Nort Holland has ruled that the insurance exemption does not apply to pension fund activities. Other courts have ruled differently and believe that the services are exempt. Assessing the VAT position of a pension fund remains a very factual matter.
Madeleine Merkx
BDO in Netherlands