New Regime for Cost Sharing Associations in Belgium

Transcription

1 Belgium/European Union Charlotte De Jaegher* New Regime for Cost Sharing Associations in Belgium Further to a request for information from the European Commission, Belgium has redefined the conditions to apply the exemption for cost sharing associations in its national legislation. The new regime is more flexible on several points than the old one, while enforcing more transparency for the VAT administration. In this article, the author clarifies the essential changes under the new regime and compares these to the requirements of the exemption as set out at European level. 1. Introduction Article 132(1)(f) of the VAT Directive 1 provides for an exemption of cost sharing arrangements through which services are provided by a cost sharing association (CSA, so-called independent groupings in Belgian VAT language) to its members. The aim of this exemption is, in essence, to alleviate taxable persons supplying exempt transactions from a VAT cost on certain services in cases where it is more efficient to outsource these services. The Court of Justice of the European Union (ECJ) summarized the rationale as to create an exemption from VAT in order to avoid an entity offering certain services from being required to pay that tax when it has found it necessary to cooperate with other entities by means of a common structure set up to undertake activities essential to the provision of those services. 2 The provision of the VAT Directive was almost literally transposed into Belgian VAT law (Belgian VAT Code) 3 and the conditions to apply the exemption were further outlined in a royal decree 4 and in a circular letter. 5 However, in 2014, the European Commission officially questioned the compliance of the conditions for CSAs in Belgium with European VAT law. 6 Further to the information provided, the European Commission concluded that the Belgian requirements for the VAT exemption * Teaching assistant at the University of Leuven, Belgium and lawyer at Laga, Belgium. 1. Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, OJ L347 (2006), EU Law IBFD. 2. NL: ECJ, 11 Dec. 2008, Case C-407/07, Stichting Centraal Begeleidingsorgaan voor de Intercollegiale Toetsing v. Staatssecretaris van Financiën, ECJ Case Law IBFD, para (Former) art. 44 2, 1bis Belgian VAT Code. 4. (Former) Royal Decree 43 of 5 July (Former) Circular Letter 3 of 9 May The questions were more specifically directed towards (1) the scope of the exemption, (2) the right to deduct VAT at the level of the members, (3) cost sharing associations without legal personality and (4) transactions performed by a member to other members of a cost sharing association. were not in line with article 132(1)(f) of the VAT Directive. Taking the remarks of the European Commission into account, Belgium recently implemented a new provision in the Belgian VAT Code with regard to the exemption for CSAs 7 (thereby deleting the previous version of the exemption entirely). In addition, the VAT administration published a circular letter in which it further clarifies the conditions for applying the exemption. 8 The old regime 9 was an all-in or all-out system, under which the application of the VAT exemption was excluded on the entire activity of the CSA if one of the conditions was not met. As it is explained in this article, the new regime is considerably more flexible in that it allows a CSA to perform taxable and exempt transactions. Furthermore, in most cases the consequences of non-compliance with a condition is limited to a specific member (e.g. the member is excluded from the CSA) or a specific transaction (e.g. a certain transaction provided by the CSA is subject to VAT). 2. New Conditions for the VAT Exemption 2.1. Scope In order to apply the exemption, the new provision in the Belgian VAT Code requires that the association (i.e. the umbrella organization ) is separate from the members, either because it has legal personality or because it acts as an entity separate from its members and third parties. This independence requirement is a precondition to qualify as a separate taxable person able to render exempt (or taxable) services for VAT purposes. The exact legal form of the association is irrelevant and hence it may have a form which implies a profit aim. This is in line with the position of the European Commission, which refers to the wording of the provision in the VAT Directive and concludes that the exemption does not include any restrictions regarding the nature of the entity that can be used as a vehicle for forming a CSA Nature of the activities of the members In line with the rationale of the exemption for CSAs, there are certain conditions regarding the nature of the activities of the members which are to be complied with. 7. See art. 44 2bis Belgian VAT Code. 8. Circular Letter AAFisc 31/2016 (E.T ), 12 Dec For an extensive overview of the old regime, see K. Vyncke, Cost Sharing Associations as an Alternative to VAT Grouping in Belgium, 17 Intl. VAT Monitor 4, pp (2006), Journals IBFD. 10. European Commission VAT Committee Working Paper 856, Scope of the exemption for cost-sharing arrangements: a further analysis, 6 May 2015 (taxud.c.1(2015) EN), at p International VAT Monitor July/August 2017 IBFD

2 New Regime for Cost Sharing Associations in Belgium As a preliminary note, it is no longer required that all members of the CSA carry out an activity of the same nature or that they belong to the same financial, economic, professional or social sector. In addition, it should be noted that the Belgian VAT exemption is not limited to a specific sector (e.g. the medical sector). In view of the recent diverging viewpoints of the Advocate General in the DNB Banka case 11 and an infringement procedure against Germany, 12 it remains to be seen whether the broad application of the Belgian VAT exemption, which allows, for example, CSAs in the financial sector, is compliant with the VAT Directive. Under the new provision in the Belgian VAT Code, the members must perform an activity that is exempt or outside the scope for VAT purposes on a regular basis. The activities that are exempt or outside the scope must represent the majority of the activities of the members. In its circular letter, 13 the VAT administration clarifies on this point that although the starting point is that the members perform a VAT-exempt or outside-the-scope activity, it should be taken into account that, in practice, members often develop taxable activities for VAT purposes besides their core VAT-exempt or outside-the-scope activities. The VAT administration applies a threshold of 50% of the total turnover to determine the majority of activities. Hence, the activities which give rise to a right for a VAT deduction must remain below 50% of the total turnover 14 of the member at the end of each calendar year. This condition is to be assessed at the level of each member individually. Thus, one member is not allowed to perform exclusively taxable activities, whereas the other members perform VAT-exempt activities, even if the majority of the activities of the members as a whole is of an exempt nature. If the taxable activities of a member are equal to or exceed the aforementioned 50% in a given year, the application of the exemption on the services vis-à-vis that member is in principle not justifiable. In that case, the CSA is required to perform a regularization which implies that VAT is paid on the services provided to that member as from 1 January of the year in which the 50% rule was exceeded. In addition, that member is to be excluded from the CSA. In practice, the Belgian VAT administration takes a flexible position in that it foresees a tolerance where the 50% rule is exceeded but only to a limited degree (i.e. if a member exceeds the 50% rule only exceptionally and only by 10%). In that case, the VAT exemption can still 11. LV: Opinion of Advocate General Kokott, 1 Mar. 2017, Case C-326/15, DNB Banka AS v. Valsts ieņēmumu dienests, ECLI:EU:C:2017:145, ECJ Case Law IBFD. 12. DE: Opinion of Advocate General Wathelet, 5 Apr. 2017, Case C-616/15, European Commission v. Federal Republic of Germany, ECLI:EU:C:2017:272, ECJ Case Law IBFD. 13. Supra n The total turnover is calculated on the basis of the activities that give rise to a VAT deduction (related to taxable activities), the VAT-exempt activities and the turnover generated from activities that are outside the scope of VAT. The latter category is only taken into account in so far as it can be allocated to a specific type of activities. For example, dividend income falls outside the scope of VAT, but is taken into account to assess the 50% rule because it relates to a specific activity (i.e. holding of shares). To the contrary, general subsidies not linked to any activity are not taken into account to calculate the 50% rule. be applied, subject to specific conditions. Under the previous regime, it was assumed that each member used the services received for its exempt or outside-the-scope activities, even if that member also carried on activities subject to VAT. However, the turnover relating to the latter category had to remain below a threshold of 10% of the total yearly turnover. By comparison, the new rules allow for a higher degree of taxable activities but limit the application of the VAT exemption to services linked to the exempt or outside-the-scope activities of the members. In addition, the new rules also offer legal certainty by applying a clearcut rule even if the European Commission does not seem to be in favour of such an exact limitation Nature of the activities of the CSA Under the new regime, it is accepted that the CSA provides both goods and services to its members without jeopardizing the benefit of the VAT exemption. In order to effectively apply the VAT exemption, the services provided by the CSA must, however, comply with a number of requirements. Firstly, it is evident that the VAT exemption only applies to services provided to members. The CSA may also provide services to third parties, but these do not fall within the scope of the VAT exemption and are subject to the general rules. The VAT exemption is also not applicable to services provided by one member of the CSA to another. Additionally, the supplies of goods which are essential and ancillary to the service provided to members may exceptionally fall within the scope of the exemption. Other supplies of goods (to members or non-members) by the CSA are subject to VAT according to the general rules. As it follows from the above that the CSA can also perform taxable activities, the CSA also needs to comply with the 50% threshold in order to ensure that the majority of its activities is of an exempt nature. Hence, similar to the conditions for the members (see section 2.2.), more than 50% of the total turnover of the CSA relating to services must be of an exempt nature. 16 Secondly, the services should be directly necessary or should form an essential input for the activities that are exempt (or outside the scope of VAT) of the members. This was also a requirement under the old rules but it is now further clarified that these services must specifically relate to the VAT-exempt (or outside-the-scope-of-vat) activities and must be indispensable for these activities. 15. The European Commission states that there seems to be no foundation either for the application of an eventual ceiling limiting up to a maximum the number of taxable activities that a member of the cost-sharing group can undertake. However, the position of the Belgian VAT legislator seems justified: For practical reasons and in order to facilitate the correct and straightforward application of the exemption, it seems reasonable requiring the exempt activities of the member to be carried on in a consistent manner rather than merely sporadically, and to represent a significant part of the member s business. An eventual decision in this matter is left to the discretion of the Member States... ; see EC Working Paper 856, at p Similar to the 50% threshold applicable to the members, a tolerance is also foreseen for the CSA in case it exceeds the threshold exceptionally and to a limited degree. IBFD International VAT Monitor July/August

3 Charlotte De Jaegher The parliamentary preparatory documents on the new provision in the Belgian VAT Code further clarify that catering services vis-à-vis the employees of the members and services provided for private purposes of the members cannot be regarded as essential services. All other services provided are as a starting point considered to fall within the scope of the exemption, subject to the condition that all other conditions are met (in particular, the absence of any effective or potential distortion of competition, see section 2.5.). In this regard, it is relevant to note that the VAT administration has not included any other positive or negative examples on directly necessary services, such as the examples used by the European Commission. In the EC Working Paper, reference is made to other services of a general nature such as cleaning services, security services, or legal and tax advice as examples of activities which cannot be seen as directly necessary for the exempt supplies. 17 Thirdly, as the VAT administration now allows for members to also carry out taxable activities, it is clarified which VAT treatment should be applied to services which are used for both taxable and exempt activities of the members. Such services are subject to VAT, unless the part that relates to the exempt or outside-the-scope transactions is charged separately (e.g. a separate line on the invoice). The circular letter refers to the example of security services provided to a museum. The museum activities are in principle exempt from VAT, except for the cafeteria. Hence, these security services cannot benefit from the VAT exemption for CSAs, unless the services relating to the VAT-exempt museum activities are charged separately. The apportionment method to be used to segregate the taxable from the exempt part of the services will need to be worked out by the CSA and its members. At the level of the members, the correct apportionment, potentially combined with the direct allocation deduction method, is crucial to mitigate the VAT cost. Lastly, it is also confirmed that in line with the case law of the ECJ 18 the CSA is not required to provide the same services to every member. Also, the scope of the services provided can vary from member to member Remuneration paid by the members (and non-members) The essential aim of a CSA is to pool common expenses which would otherwise imply a VAT cost at the level of each of the members who perform activities that are exempt or out of the scope of VAT. Hence, the amount charged by the CSA to the members must be limited to the reimbursement of their share in the joint expenses. This was already a requirement under the old rules. This requirement only relates to the services provided by the CSA. As a consequence, the consideration for supplies of goods may exceed the cost price. This condition is considered to be fulfilled if any profits obtained are not paid to the members but used to optimize 17. EC Working Paper 856, at p Intercollegiale Toetsing (C-407/07). or support the services provided by the CSA. In principle, the recharge by the CSA must be based on the precise amount of the joint expenses to be attributed to each individual member. If the precise amount cannot be determined, it is also allowable to calculate the amount charged to each member based on predefined, objective criteria (e.g. time spent on the services rendered to individual members, turnover of the individual members, etc.). In the absence of any requirements in the law regarding the timing of the recharge, the VAT administration, again, takes a flexible position. For example, the CSA is allowed to charge advance payments or membership fees, subject to the condition that such fees are calculated in accordance with the real expenses incurred by the CSA, which will be determined on a periodical (mostly annual) basis. The requirement for the CSA to be remunerated at cost also needs to be fulfilled for the services rendered to non-members. On this point, the Belgian rules differ from what is required by the European Commission, which accepts that a profit margin is charged to non-members: It seems inevitable that a cost-sharing group could make a profit out of the taxed supplies made to members or non-members of the cost-sharing group. The condition that services supplied by the group must be at cost refers only to those services supplied to members in respect of which the exemption applies and the exemption cannot be put into question by profit generated from such other activities. 19 In the preparatory works 20 to the new provision in the VAT Code, this strict position is justified on the basis of distortion of competition as the association could be able to further lower the charges towards its members by means of the profit generated from transactions with non-members, which would lead to a distortion of competition. 21 It is noteworthy that neither the preparatory works relating to the new legal provision nor the circular letter contains guidance on the effect of transfer pricing corrections. As discussed by Jovanovic and Merkx, 22 such corrections may lead to an uplift of the remunerations received by the CSA, which implies that the remunerations exceed the exact share in the cost. 23 In his conclusion in DNB Banka, the Advocate General is of the opinion that the exemption is not applicable where a consideration is paid for the supply of services which goes beyond the expenses incurred. That is also the case where, as required under the legislation on direct taxation, a simple flat-rate cost uplift is paid. 24 The position of the ECJ on this point is still to be given, but in the author s opinion it should be possible to add the (expected) tax cost that would result 19. European Commission VAT Committee Working Paper 883, 30 Sept. 2015, taxud.c.1(2015) , point Parliamentary Documents DOC /001, 29 Mar See also Circular Letter AAFisc 31/2016 ( E.T ), 12 Dec. 2016, p N. Jovanovic & M. Merkx, The Cost Sharing Exemption under Debate Part I, 27 Intl. VAT Monitor 5 (2016), Journals IBFD. 23. See European Commission, Working Paper 450; Working Paper 654, 3 Mar. 2010; Working Paper 856, 6 May Opinion in DNB Banka (C-326/15); and PL: Opinion of Advocate General Kokott, 1 Mar. 2017, Case C-605/15, Minister Finansów v. Aviva Towarzystwo Ubezpieczeń na Życie S.A. w Warszawie, ECLI: EU:C:2017:150, ECJ Case Law IBFD, points 20 and International VAT Monitor July/August 2017 IBFD

4 New Regime for Cost Sharing Associations in Belgium from a service provision at cost (based on a full cost view) to the cost incurred by the CSA Absence of distortion of competition Similarly to the old provision, the new provision in the Belgian VAT Code states that the VAT exemption for CSAs cannot be applied if this would give rise to a distortion of competition. In the new circular letter, however, the VAT administration puts, in the author s view, a lot more emphasis on the effective application of this condition. The VAT administration highlights that some of the aforementioned conditions are already aimed to limit any distortion of competition. This is for example the case for the requirement that the association should provide the majority of its services to members and that it cannot have a profit aim. In addition, some of the formalities to be complied with (see section 2.7.), are also aimed at enabling the VAT authorities to verify the existence of a distortion of competition. The Belgian VAT administration does not provide a list of services that could cause a distortion of competition. To the contrary, anyone who considers himself in a less favourable position due to the VAT-exempt activities of a CSA, can file a complaint with the VAT administration. The VAT administration will assess the risk of a distortion of competition on a caseby-case basis in line with the principles in the case law of the ECJ. Depending on the situation, the VAT exemption can in principle not be denied retroactively as a result of this process Employees of the CSA The circular letter also provides some much needed guidance on how employees can be engaged in the CSA. This is a topic where the VAT law typically interferes with requirements under labour or social law. If the CSA is a separate legal person (see section 2.1.), the employees required for the activities of the association are to be employed by the CSA. If an employee who is on the payroll of a member is placed at the disposal of the CSA, this will qualify as a service subject to the general VAT rules. Hence, such a structure is likely to lead to a VAT cost at the level of the CSA as it will not be able to (entirely) deduct the VAT charged by the member. In all cases where the CSA is not allowed to have personnel on its payroll (which will for example be the case if the association is not a separate legal person), the employees will need to be hired by a member for the account of all other members. By placing these employees at the disposal of other members or of the CSA as a separate person, the member in fact performs a service subject to VAT based on the general rules, which would trigger a VAT cost as the association will not or not entirely be able to deduct the VAT on these services. In order to mitigate this VAT cost, the VAT administration has included a tolerance in its circular letter which implies in essence that, where these employees are engaged in the VAT-exempt activities of the association, the placing at the disposal of employees is not subject to VAT. This allows the member to recharge all salary costs regarding the employee, including indirect costs such as the company car, laptop, etc. The joint use of the personnel must be based on the cost sharing agreement between all members. The contract should also contain for each employee the name and employment regime (e.g. full-time, part-time, etc.) Formalities The new rules also contain important changes regarding the formalities to be complied with by CSAs. More specifically, CSAs are obliged to inform the VAT administration of their existence, their members and their activities. Whereas, under the old regime, a VAT inspector was often only informed of the existence of a CSA in the event of a VAT audit or in case the CSA would buy services abroad, these formalities under the new regime will allow the VAT administration to better control the use of CSAs should they deem this necessary. It should be noted that these formalities are also to be complied with by CSAs established in other countries but with members established in Belgium who apply the VAT exemption (i.e. in the case of a cross-border CSA). 3. Interaction with the Concept of VAT Grouping Belgian VAT Perspective A recurrent question in the framework of the VAT exemption for CSAs is how this VAT exemption interacts with the concept of VAT grouping. From a VAT-technical point of view, a clear distinction should be made between both. Transactions falling under article 132(1)(f) of the VAT Directive are inside the scope of VAT but exempt for VAT purposes, whereas the transactions between members of a VAT group remain outside the scope for VAT purposes. 25 In addition, it is crucial to point out that a CSA as an independent group of persons considerably differs from a VAT group, which is to be considered a single taxable person for VAT purposes. 26 When these concepts are combined, two questions arise: (1) whether a VAT group as a whole can become a member of a CSA and (2) whether a CSA can become a member of a VAT group. Even though the Belgian VAT administration has not taken a position in its circular letter on this topic, in the author s view there are several elements in other administrative commentaries which indicate which position they might take when questioned on this issue. As a starting point, the conditions and consequences of both VAT grouping and CSAs need to be complied with in order to combine both. The question of whether a VAT group can become a member of a CSA was already answered positively by the 25. EC Working Paper 856, at pp. 21 to Communication of the Commission to the Council and the European Parliament on the VAT group option provided for in Article 11 of Council Directive 2006/112/EC on the common system of value added tax (COM(2009)325), sec. 2; VAT Committee, Working Paper 845, taxud.c.1.(2015) See also SE: ECJ, 17 Sept. 2014, Case C-7/13, Skandia America Corporation USA, filial Sverige v. Skatteverket, ECJ Case Law IBFD. IBFD International VAT Monitor July/August

5 Charlotte De Jaegher Belgian Ruling Commission under the old legislation. 27 To the contrary, the Ruling Commission does not allow for one member of the VAT group to become a member of the CSA. Whether the conditions for applying the VAT exemption for CSAs are fulfilled will in that case need to be assessed at the level of the VAT group as a whole. Considering the VAT group as a single taxable person is in the author s view in line with the position taken by the Belgian VAT administration in the framework of the law of the ECJ in Skandia. 28 More specifically, in an official decision of 2015, the VAT administration confirmed a broad application of the Skandia case law, which entailed that transactions between a Belgian VAT group and a non-belgian establishment of a member of the VAT group are inside the scope for Belgian VAT purposes. 29 Hence, the VAT administration acknowledged that, from a Belgian VAT perspective, a VAT group is considered to be a separate taxable person. In order to be consistent with this reasoning, it can be argued that it should be the VAT group as a whole that becomes a member of the CSA, and not one of its members. Such a position would be in line with the viewpoint of the European Commission. 30 In the author s view, the other case, where the CSA becomes a member of the VAT group, could be possible based on Belgian VAT law, subject to the condition that the VAT group as a whole complies with all conditions to act as the CSA henceforth. This implies, for example, that the exempt services provided by the VAT group to members of the CSA must exceed 50% of the total turnover relating to services of the VAT group. However, also based on the aforementioned Skandia reasoning, it could be argued that the CSA, due to its membership of the VAT group, ceases to exist as the VAT group should be considered a single taxable person. Hence, the VAT group is to be considered to be providing the services and not the CSA Conclusion Under the new Belgian regime for CSAs, the tax administration has provided some much needed guidance. In allowing the CSA to become a mixed taxable person, the new regime is more flexible on several points (e.g. members may also develop VAT-taxable activities, the association may also supply goods, etc.) and by imposing clear conditions and thresholds (e.g. the 50% threshold for exempt turnover derived from services provided to members), legal certainty is considerably improved. The new regime does involve additional formalities to be complied with but, in the author s view, this is justifiable considering that they are aimed at more transparency of the regime for the tax authorities. However, the new regime might be impacted once the ECJ decides on several pending cases, such as DNB Banka. 27. Belgian Ruling Commission, Ruling , 17 May Skandia America (C-7/13). 29. Decision Belgian VAT administration, E.T , 3 Apr EC Working Paper 856, at pp. 23 to Id., at pp. 24 to International VAT Monitor July/August 2017 IBFD