On July 18th 2013, the Court of Justice of the European Union (the "CJEU") ruled that a company establishing a pension scheme as a separate legal entity may deduct the VAT it has incurred on services relating to the management and operation of the pension fund pursuant to article 17 of Directive 77/388/EEC (the "Sixth VAT Directive").

In the case at hand, pursuant to a statutory obligation, a group of companies forming a unity for VAT purposes ("PPG") set up a pension scheme for their employees and former employees in the form of a pension fund into which the companies paid contributions.

As required by law, the fund was established as a separate entity for legal and fiscal purposes. One of PPG's subsidiaries contracted with various service providers for the administration and management of the fund. The costs related to these services were not recharged to the fund and the input VAT was deducted by PPG.

The Dutch tax authorities denied the deduction on the grounds that the costs were not incurred for the benefit of PPG, but that the recipient of these services was the pension fund, a separate legal entity. Therefore, PPG was not entitled to recover the input VAT, regardless of whether it contracted and paid for the services. PPG argued that it should be entitled to recover VAT, due to the fact that the expenditure relating to the pensions of its employees was part of the overheads of its economic activity.

In the conclusion of the Advocate General, a distinction is made between the services that are linked to the setting-up of the pension fund - which would be deductible - and the services linked to the management and operation of the fund - which would be non-deductible. The reason for this position is that, considering the criteria of direct and immediate link which is relevant to determine if an input VAT is deductible or not, the services relating to the management of the fund would be closer to the activites of the fund than those of PPG.

"The CJEU did not follow the conclusion of the Advocate General."

Taking into consideration that PPG set up the fund in order to fulfill its legal obligations regarding the pensions of its employees, the CJEU ruled that the exclusive reason for the acquisition of the services lies in the taxable activities of PPG and there is a direct and immediate link between the activites of PPG and the services. The VAT that PPG has incurred on services relating to the management and operation of the pension fund are therefore deductible if the costs are part of its overheads, which is for the national court to determine. According to the CJEU, a different conclusion would be in contravention of the principle of neutrality as the VAT burden would be higher for a taxable person structuring its pension scheme through a pension fund having separate legal personnality compared to other possible pension schemes.


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