On December 6, 2011, the Ministry of Finance published a decree regarding the deduction of VAT on the acquisition of goods and services. The decree covers various subjects including how, according to the Ministry of Finance, to allocate VAT on such acquisitions to exempted activities and ‘non-commercial activities’ performed by subsidized organizations.
New favorable concessions and approvals have been granted for some sectors, for example for libraries, and local and regional broadcasting networks. For other sectors, the policy announcement falls in the category ‘no news is good news’, and the existing favorable policy will be continued. The latter applies to, for example, travel agencies, partnerships and limited partnerships. The Ministry has also taken some less favorable and, in our view, debatable positions, however: for example the limitation of the favorable tax treatment of mutual costs in the event of cooperation between exempted businesses, and the VAT rules on vacant real estate.
The decree contains important information specifically with regard to:
1. Libraries
2. Employers’ organizations
3. Travel agencies
4. Lessors of real estate
5. Local and regional broadcasting networks
6. Educational organizations
7. Joint ventures
8. Owners’ Associations.
However, the new policy also affects all other businesses and organizations with a special VAT status, as they perform activities that do not generate any income or that are VAT-exempt, as well as activities that are subject to VAT; for example subsidized organizations.
The decree also contains policy rules on VAT deduction that can affect all taxpayers subject to VAT, for example rules on:
a) the performance of activities for which no price was stipulated;
b) partial termination and/or transfer of business activities;
c) private use of business assets and ‘asset labeling’;
d) mutual cost allocation;
e) late invoicing;
f) repairs;
g) costs and investments in connection with foreign activities.
The decree contains policy regarding a number of sectors and deals with various matters. The main features regarding the most important matters are summarized below.
Specific rules/approvals and concessions
1. Libraries: approval/concession
Free lending of books to children does not lead to a limitation of the right to deduct VAT.
2. Employers’ organizations (such as shopkeepers’ and professional associations), business investment zones (‘BIZ-stichtingen’) and commodity organizations and trading associations: approval/concession
The organizations referred to have in common that they promote, in various ways, the interests of the associated businesses. As a result of the complete or partial absence of own activities that are subject to VAT, they have no right to deduction of VAT on acquired goods or services. The associated businesses usually do have that right. Deduction of VAT by the employment organizations referred to is therefore permitted subject to specific conditions, i.e. to the extent that the associated businesses bear the association-related costs by means of general membership fees or contributions, and that they themselves would be able to deduct the VAT on the acquired goods and services.
3. Travel agencies
The new policy allows travel agencies to deduct 96% of all VAT charged to those agencies. The remaining 4% is considered to be allocable to the taking out of insurance. Travel agencies are free to deviate from this rule if the statutory pro rata use or the actual use of acquired goods and services would allow them a more favorable deduction percentage. Naturally, this must be substantiated.
4. Lease of real estate – vacancy of real estate
A distinction is made between VAT on acquisition and building costs that is adjusted within ten years, and VAT on maintenance costs. Under the decree, real estate vacancy as such does not result in mandatory payment or repayment of adjustment VAT, i.e. VAT that was deducted when the real estate was acquired or newly built. Nor does vacancy lead to an additional right to deduction of VAT that was not deducted when the real estate was acquired. We find the latter debatable.
According to an example in the decree, a one-year period of vacancy following a two-year period of occupation subject to VAT does not result in mandatory repayment (adjusted) of 10% of the VAT that was deducted upon acquisition/occupation, even if the real estate is exempted after the third year. However, the same decree also states that the vacancy of a building that is used both for taxed and tax-exempt purposes in any one financial year must be ignored. Consequently, the cost of acquisition VAT or new construction VAT allocated to the vacant part must be repaid (adjusted) in part on account of the partial exempted occupation. In our view, this reasoning is inconsistent. We consider it justifiable that unoccupied parts of real estate are destined to be rented subject to taxation, so that a right to deduction exists, or arises, and continues to exist. In our view, this also applies to maintenance costs that can be allocated to vacant parts of real estate. According to the Ministry, however, these maintenance costs must be allocated on the basis of the general ‘pro rata’ rule, with a potentially less favorable outcome. The intended use for purposes subject to taxation must of course be substantiated.
5. Local and regional broadcasting networks
The new policy takes a position in respect of the allocation of input VAT. In short, this standpoint is that taxed income from, predominantly, advertising, may be divided by the total income and multiplied by the VAT on acquisitions. In the event of a deficit, the taxed income must be divided by the total costs, leading to a lower VAT reduction percentage. The decree contains detailed rules and examples. Local and regional broadcasting networks are free to make an appeal to statutory rules or case law if that would lead to a more favorable outcome, if necessary as a departure from the position taken by the Dutch Revenue.
6. Educational organizations and new construction: approval/concession
Private educational organizations may, subject to specific conditions, decide not to apply the self-supply charge. This is the VAT charged in the event of the first use of real estate built on behalf of the organization and destined for educational purposes. The charge usually entails an additional VAT charge. If the self-supply charge is not applied, no VAT may be deducted during construction and the tax base (i.e. the construction costs) may not be added to the taxed turnover that forms the basis of the pro rata VAT deduction on general costs. The latter condition specifically is new and important, because this may present a risk if the construction costs are retroactively included in the pro rata deduction calculation.
7. Joint ventures, such as partnerships, general partnerships, and limited partnerships: approval/concession
VAT that is invoiced to one of the participants (partners) may, subject to specific conditions, be deducted from the VAT return of the joint venture. In that event, the joint venture takes the place of the participant in respect of VAT rights and obligations, for example for the application of VAT adjustment rules.
8. Owners’ Associations that do not operate as VAT taxpayer in their own right: approval/concession
The objective of the underlying policy is to look beyond the association, for purposes of VAT deduction and, subject to specific conditions, to grant the members/owners a right to deduction of VAT to the extent that they themselves are entitled to such right and in proportion to their financial contribution.
Policy applicable to all taxpayers subject to VAT
a) Activities for which no price was stipulated
This primarily concerns subsidized activities, such as (scientific) research. If such activities are performed by a business that also performs commercial activities for which a price was stipulated, it depends whether or not the total VAT reduction will be restricted. The deduction will not be restricted if the non-commercial (generally subsidized or sponsored) activities are closely linked with the commercial activities.
If that is not the case, the input tax must be allocated and the deduction will be limited. The decree contains detailed rules to this effect.
b) Partial termination and/or transfer of business activities
VAT on costs related to the above is deductible to the extent that a right to such deduction exists or existed within the part of the business that was terminated or transferred.
c) Private use of business assets and asset labeling / transitional rules in respect of real estate that was included in the business assets before January 1, 2011
The relevant policy rules primarily affect self-employed business owners. Choosing (wholly or partially) for ‘business assets’ only leads to VAT deduction for movable capital assets in the case of private use. Subsequently, in the event of private use, VAT is owed annually. The right to VAT deduction no longer exists in respect of real estate to the extent that such real estate is intended for private use, regardless of the extent to which they have been labeled as business assets. Wholly or partially opting for business assets can, however, also be relevant for the VAT position of real estate in respect of a future sale or later adjustments to the part used for private or business purposes. The Ministry is of the view that, once a choice has been made for partial private or business assets, the right to claim a supplemental deduction in the event of an increase in the use for business purposes is not possible.
The decree also contains explanations of several terms in the transitional rules published earlier in respect of real estate that was included in business assets before January 1, 2011, and that is still covered by the old rules.
d) Mutual cost allocation: increased risk for banks, insurers, health care and educational organizations, and other cooperating partners not entitled to VAT deduction
In certain circumstances, a cost allocation according to a fixed, predetermined allocation key, according to which the risk of the costs is borne by the participants, will not constitute the charging or on-charging of a payment for a supply which is subject to VAT. Partly due to this, businesses and organizations not entitled to deduct VAT such as banks, insurance companies, and health care and educational organizations, occasionally cooperate on that basis. However, the decree lays down that the cost allocation key must be determined for the whole period of cooperation for there to be an untaxed cost allocation. It is our view that this condition is incompatible with the case law of the Supreme Court on the subject of cost allocation, where this requirement is not to be found. This is a major policy swing in respect of cooperating businesses and organizations that are not entitled to VAT deduction.
e) Late invoicing
Subject to specific conditions, VAT can be deducted in the period in which the late invoice was received. The period in which the delivered goods or the acquired services were employed is used to determine the right of deduction.
f) Repairs
Subject to specific conditions, a business that causes damage that arranges for the damage to be repaired may deduct the VAT on those repairs. In the view of the Ministry, such right only exists to the extent that the business suffering damage is entitled to deduct VAT. In our view, this requirement is debatable.
g) Costs and investments in connection with foreign activities.
A right to deduction of Dutch VAT exists if the supplies that are taxable abroad in respect of which costs are incurred or investments are made would or could be subject to taxation in the Netherlands. There are specific requirements in respect of the renting out of real estate abroad.