The Netherlands: Pension fund management: VAT-taxable or exempt?

The CJEU aims to provide further clarity

In brief

The VAT exemption for the management of special investment funds (SIFs) has been subject to discussions and extensive CJEU case law for many years. Joint case C-639/22 X v. Inspecteur van de Belastingdienst Utrecht is the most recent addition to the list. The central issue in this case is whether certain Dutch pension funds are eligible for the VAT exemption. In this article, we discuss the outcome of this judgment and why it is relevant. But first, we will draw the landscape of the VAT exemption to understand its rationale and how its scope has evolved under CJEU case law.


In more detail

Background of the VAT exemption

The VAT Directive provides for an exemption for the management of SIFs. The exemption aims to provide VAT neutrality when it comes to choosing how to invest funds: Either manage your investment portfolio by yourself, or pool money in a collective investment fund that is being managed by a professional investment manager. When choosing between these two options, VAT should not be a decisive factor and both options should — for VAT — be treated equally.

After all, if an investor manages its own investment portfolio without the help of an investment manager, it does not incur VAT on investment management fees. This should not be different if that same investor chooses to invest through a collective investment fund, which is managed by an investment manager. In such a case, the investment fund does incur fees from an investment manager. If there was VAT on these fees, such VAT would be a cost for the investment fund, which would negatively impact the investment results. Therefore, investment funds are generally keen on benefitting from this specific VAT exemption. 

Because the exemption is strictly limited to the management of SIFs, it is important to understand what a SIF is. The VAT Directive does not further define SIFs and leaves the definition up to the member states. This grey area resulted in discussions on a local level on what kind of investment funds qualify as SIFs. As a result, the CJEU was given the opportunity to further explain the definition of a SIF on multiple occasions.

CJEU case law on SIFs

In Abbey National (C-169/04), the CJEU ruled that a SIF in any case entails investment funds that are within the scope of the Undertakings for Collective Investment in Transferable Securities Directive (“UCITS Directive”). The UCITS Directive aims to regulate certain investment funds, if they meet specific criteria, in order to protect investors.  

However, the CJEU ruled that — in light of fiscal neutrality — the exemption should not be strictly limited to UCITS funds but should also be available to investment funds that are sufficiently comparable to UCITS funds. In Deutsche Bank (Case C‑44/11), the CJEU provided a useful list of requirements that must be met by an investment fund to be sufficiently comparable to a UCITS fund, as follows: 

  • The object of the fund is the collective investment in transferable securities and/or other liquid financial assets.
  • The capital of the fund is raised from the public.
  • The fund operates on the principle of risk-spreading. 
  • The units of the fund are, at the request of holders, repurchased or redeemed, directly or indirectly, out of the fund's assets.

In Fiscale Eenheid X (C-595/13), the CJEU addressed whether real estate investment funds — i.e., investing in real estate assets — could be considered SIFs. In this case, the Dutch competent authority took the view that only funds that invest in financial instruments can qualify as SIFs. However, the CJEU ruled that there is no reason to assume that the exemption is restricted to funds that invest in financial instruments and ruled that real estate investment funds can qualify as SIFs, provided that such funds are subject to specific state supervision. The latter requirement would ensure that all SIFs are regulated, just like UCITS.

Application of the VAT exemption to pension funds

In parallel, the question arose whether pension funds could qualify as SIFs, and, more specifically, whether they are sufficiently comparable to UCITS funds.

In that respect, it is crucial to understand that there is no such thing as a “standard” or “typical” pension fund. Because pension funds are not harmonised at the EU level, many types of pension funds with different characteristics exist within the EU member states. For example, some pension funds guarantee a predetermined benefit when the participant reaches a qualifying age (so-called defined benefit schemes). Others require a fixed contribution, and the actual benefit to be received depends on the investment results (so-called defined contribution schemes). In addition, there are many varieties in between. Therefore, the question whether a pension fund as such can qualify as a SIF is the wrong question. Instead, each specific type of pension fund should be assessed on the basis of its own specific characteristics. In any case, the main point of discussion with pension funds is usually whether they meet the requirement that the participants bear the investment risk

In Wheels Common (C‑424/11), the CJEU tested whether a “defined benefit” pension scheme can qualify as a SIF. The CJEU ruled that this was not the case because such a fund is not sufficiently comparable to a UCITS, the main consideration is that the participants do not bear the investment risk. After all, the participant is guaranteed a certain amount, which does not depend on the investment results of the pension fund.

In the subsequent ATP case (C-464/12), the CJEU tested whether a “defined contribution” pension fund can qualify as a SIF. The CJEU ruled that such a pension fund could be considered comparable to UCITS because the participants bear the investment risk. After all, the participants contribute a fixed amount and will need to wait to see what benefit they will actually receive, depending on the investment results. 

The Wheels Common and ATP cases concerned straightforward defined benefit schemes and defined contribution schemes. There are, however, many more varieties within the pension fund spectrum. In the Netherlands, certain compulsory company- and sector-specific pension schemes need to be organized by employers. Such schemes have characteristics of both defined benefit schemes and defined contribution schemes. 

The benefits to be received by the participants are calculated on the basis of a formula of fixed parameters, such as the annual salary and years of employment of each participant, resembling a defined benefit scheme. However, the actual received benefits can be subject to price indexations, potentially lowering the receivable pension benefits. 

Whether such price indexations are required depends on the “policy coverage ratio” of the fund, which is the ratio between the present value of the held assets and the present value of existing pension benefit obligations, while also taking investment forecasts into account. Thus, such indexations are effectively a risk for the participants.

To make things even more complex, in some cases employers act as guarantors to safeguard the participants from negative effects of such indexations, thus effectively lowering the risk for participants. 

In case C-639/22, the CJEU explained whether such pension funds are sufficiently comparable to UCITS funds and can therefore qualify as SIFs.

Case C 639/22 — Inspecteur van de Belastingdienst Utrecht

This joint case concerns six Dutch company- and sector-specific pension funds that share the above characteristics. The pension funds argued that they qualify as SIFs and that the investment management fees they incur should be VAT-exempt. This is due to the fact that they held the opinion that the participants bear an investment risk that is comparable to that of a UCITS participant. The Dutch competent authority, on the other hand, considered that the pension funds do not qualify as SIFs.

The Dutch court of first instance required guidance from the CJEU and asked two preliminary questions: 

  1. Should the participants of the respective pension funds be regarded as bearing investment risks comparable to a UCITS participant, meaning that the pension fund constitutes a SIF?
  2. Does the principle of neutrality require that it must also be assessed whether — from the perspective of the average consumer — the pension funds are comparable to other funds that are not UCITS funds but are regarded by the member state as SIFs?

First question

The CJEU explained that participants only bear an investment risk if the amount of the receivable benefits primarily depends on the performance of the respective pension fund's investments. Disappointingly, the CJEU did not test whether the respective pension funds actually meet this requirement. Instead, it stated that it is up to the national court to assess and decide this. 

The CJEU did, however, provide some guidance to the national court. The CJEU explained that the number of employment years and whether this period has been interrupted at some point are irrelevant factors. 

However, whether the risk is borne individually or collectively and whether an employer acted as a guarantor during a certain period are relevant factors, without being decisive per se.

Second question

On the second question, the CJEU ruled that — in light of fiscal neutrality — it is not only necessary to assess whether the pension funds are sufficiently comparable to UCITS funds, but also whether they are — from the perspective of the average consumer — comparable to investment funds (not being UCITS) that have been identified by member states as SIFs. 

Our views

In the Netherlands, this judgment was highly anticipated, but it does not deliver the much  desired clarity. Instead, it is now up to the national court to put into practice the limited guidance given by the CJEU. The national court must now decide whether the investment risk is sufficiently comparable to a UCITS fund or whether — from the perspective of an average consumer — the respective pension funds are comparable to other SIFs in the Netherlands.   

It is a fact that the investment risk borne by the pension fund participants is not identical to the investment risk that UCITS fund participants bear. Due to the fact that there are many types of pension funds, each with their own investment risks, it is impossible for the CJEU to provide a one-size-fits-all approach and, thus, provide full clarity on this. 

However, by solely testing pension funds against the UCITS comparability requirement, the CJEU is creating a landscape where large groups of pension funds and pension fund participants are treated differently. In our view, the question is whether such differentiation is and should be justified. Furthermore, certain groups of employees are not free to choose a pension scheme but, instead, are covered by a compulsory pension scheme. With its second answer, the CJEU seems to give pension funds a bit of manoeuvring room to deviate from the UCITS comparability requirement. It remains to be seen what effect this manoeuvring room will have. After all, member states are required to define SIFs in line with EU law, forcing them to take into account the UCITS comparability test. That is at least, until the CJEU provides for a different approach.

Recommended actions

In light of these pending cases, and the limited clarity provided by the CJEU, the VAT treatment of management services provided to pension funds in the Netherlands is still not straightforward. It is highly recommended to review the current VAT treatment of the management services provided to pension funds and -where necessary- take a legal position and safeguard formal rights in anticipation of the judgment of the national court. Please reach out to us if you want to exchange views on this.


Copyright © 2024 Baker & McKenzie. All rights reserved. Ownership: This documentation and content (Content) is a proprietary resource owned exclusively by Baker McKenzie (meaning Baker & McKenzie International and its member firms). The Content is protected under international copyright conventions. Use of this Content does not of itself create a contractual relationship, nor any attorney/client relationship, between Baker McKenzie and any person. Non-reliance and exclusion: All Content is for informational purposes only and may not reflect the most current legal and regulatory developments. All summaries of the laws, regulations and practice are subject to change. The Content is not offered as legal or professional advice for any specific matter. It is not intended to be a substitute for reference to (and compliance with) the detailed provisions of applicable laws, rules, regulations or forms. Legal advice should always be sought before taking any action or refraining from taking any action based on any Content. Baker McKenzie and the editors and the contributing authors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The Content may contain links to external websites and external websites may link to the Content. Baker McKenzie is not responsible for the content or operation of any such external sites and disclaims all liability, howsoever occurring, in respect of the content or operation of any such external websites. Attorney Advertising: This Content may qualify as “Attorney Advertising” requiring notice in some jurisdictions. To the extent that this Content may qualify as Attorney Advertising, PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME. Reproduction: Reproduction of reasonable portions of the Content is permitted provided that (i) such reproductions are made available free of charge and for non-commercial purposes, (ii) such reproductions are properly attributed to Baker McKenzie, (iii) the portion of the Content being reproduced is not altered or made available in a manner that modifies the Content or presents the Content being reproduced in a false light and (iv) notice is made to the disclaimers included on the Content. The permission to re-copy does not allow for incorporation of any substantial portion of the Content in any work or publication, whether in hard copy, electronic or any other form or for commercial purposes.