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VAT reclaim for management services
The Danish tax authorities have interpreted the VAT exemption rule for “special investment funds” too narrowly, when denying VAT exemption for management services related to pension schemes. Taxand Denmark highlights how tax authorities are therefore likely to be met with recovery claims from pension providers.
According to the EU Court’s ruling in the ATP Pension Service-case (C-464/12), the tax authorities must differentiate defined contribution (DC) schemes from defined benefit (DB) schemes, when applying the VAT exemption for “special investment funds”. Only management services concerning the latter type of pension schemes are subject to VAT (the Wheels-case, C-424/11).
The ATP-case started in 2005, when ATP, a Danish provider of administrative services to pension funds, was denied VAT exemption status for all other management services than services connected to disbursement from pension funds. In addition to services linked to pay-out, ATP advices employees and employers and performs various administrative and management services linked to the pension schemes – most of which are DC schemes.
The key issue in the case was, whether the term “special investment funds” includes DC pension schemes, because management services relating to these types of funds are explicitly VAT exempt under EU law.
According to the EU Court the “special investment funds” exemption essentially applies when:
- The pension scheme is funded by the persons to whom the retirement is to be paid,
- The savings are invested applying a risk-spreading principle,
- The pension customer bears the risk and costs of the investment.
On the other hand, criteria such as the form of pay-outs from the scheme (lump sum or life annuity) and tax deductibility of contributions cannot be applied to deny VAT exemption under this exemption. Further, it is of little relevance whether contributions are paid by the employer on behalf of the pension customer, and whether it is possible to add an ancillary insurance element.
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The outcome of the ATP-case compared with the Wheels-case shows that DC schemes must be differentiated from DB schemes, and that this contrast hinges on who bears the risk and costs of the investment in each category of pension schemes.
The ruling has paved the way for repayment claims from a large number of pension providers and their administrators, who wrongly paid VAT on management services provided to DC schemes. Such repayment claims can under Danish law include up to ten years of VAT.
In order to avoid (more) recovery claims from being time-barred, assessment should be done as soon as possible on a case-by-case basis for all managers of DC schemes, whether they are eligible for repayment. Additionally, the ruling will entail saved VAT costs on management services going forward for the pension providers, who typically cannot recover most of their VAT on their investment activities.