A recent ruling by the Arnhem-Leeuwarden Court of Appeal has put the Dutch pension landscape under pressure. According to the court, industry-wide pension funds are no longer exempt from VAT. What may seem like a technical tax issue at first glance has major consequences,especially for employers in sectors such as healthcare, education, and government.
These employers typically do not perform VAT-taxable activities and therefore cannot recover VAT charged to them. A VAT levy on pension contributions would thus translate directly into higher costs.
What was before the court?
The Court of Appeal ruled on two cases brought by the pension funds for bakers and painters against the Dutch Tax Authorities. The funds sought permission to charge VAT on their administrative and execution costs so they could reclaim the VAT they themselves incur.
The ruling, however, went much further than expected. The court held that not only execution costs, but also the entire pension contribution may fall within the scope of VAT at 21 percent. This would mean that pension funds may be required to charge VAT to employers on the pension contributions they collect.
Significant impact on employers
The impact of this ruling could be substantial. Employers affiliated with large pension funds such as ABP (government and education) and PFZW (healthcare) are particularly affected. As these employers do not charge VAT themselves, they cannot recover the additional VAT on pension contributions.
Until now, pensions were generally treated as insurance products and were therefore VAT-exempt. The court takes a different view. Its reasoning is based on the fact that, in certain situations, participants may be able to claim pension benefits without having paid contributions. Industry-wide pension funds seek to prevent this through the statutory obligation for employers to participate, an issue that has previously arisen in cases involving companies such as Booking.com. According to the court, the fact that such situations are rare in practice is irrelevant.
Responses and next steps
The ruling has caused significant concern. The Dutch Pension Federation is reviewing the decisions and consulting with stakeholders, including government ministries, to explore possible solutions. The pension funds involved, together with their adviser PwC, are considering filing an appeal in cassation with the Supreme Court.
If this does not provide relief, legislative intervention may be unavoidable. The current situation is undesirable for all parties involved: employers in certain sectors face a 21 percent increase in pension costs, while their competitive position is weakened. Although the Treasury benefits from higher VAT revenues, the broader economic and social implications are problematic.
Is the new pension system the solution?
For pension funds transitioning to the new pension system, the issue appears to be temporary. During the legislative process for the Future Pensions Act, it was established that pension funds qualify as collective investment funds for VAT purposes and are therefore exempt from VAT.
Until such a transition takes place, however, the ruling remains relevant. The same applies to funds that will not transition. This is particularly concerning given recent reports that many pension funds will not be able to implement the new system on time. As a result, the VAT issue may persist longer than anticipated.
A long-standing debate
The VAT treatment of pension funds is not a new topic. For more than a decade, pension funds and asset managers have been litigating over whether pension funds qualify as common investment funds, which have been subject to a European VAT exemption since the 1970s.
The Supreme Court is still considering a related case and is expected to deliver its judgment later this year. That decision could once again significantly influence the VAT treatment of pensions in the Netherlands.