Court of Appeal rejects VAT recovery right of PE funds in liquidity events | Deloitte Netherlands

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Court of Appeal rejects VAT recovery right of PE funds in liquidity events

On September 14, 2021, the Amsterdam Court of Appeal ruled that a Dutch entity that is part of a private equity structure is not entitled to recover VAT on costs relating to refinancing, even though the entity recharged these costs. This decision could have a significant impact on the right to recover VAT in case costs are incurred for liquidity events of private equity funds.

25 October 2021

Background

In the case at hand (link, only published in the Dutch language), the entity (hereafter: ‘the Bond Issuer’) issued a listed bond with the purpose to on-lend the funds to an entity part of the same private equity group (hereinafter: the Portfolio).

Several service suppliers rendered services to the Bond Issuer. Although the engagement for the services had generally been concluded with the private equity funds or the Portfolio, all invoices were eventually issued in the name of and payment was settled by the Bond Issuer. The Bond Issuer and the Portfolio agreed that all costs and expenses incurred by the Bond Issuer in connection with the preparation and execution of the financing could be recharged to the Portfolio (without a markup).

The Dutch tax authorities took the position that the Bond Issuer, as recipient of the services, had to remit reverse charged Dutch VAT on the services, but was not entitled to recover any VAT as the costs only related to its financing activities (instead of the (VAT taxed) recharges of the costs).

Judgment of the Court of Appeal

The Court of Appeal ruled that, as the services commenced at the moment that the Bond Issuer had not yet been established, the contractual service agreements are deemed to be concluded on behalf of the private equity funds or the Portfolio. As the recipient of the services should be determined at the moment the services are rendered, these circumstances likely prevent that the Bond Issuer can be considered as the recipient of the services. As such, the Court disables the possibility of the Bond Issuer to recover VAT on the financing costs.

As the Bond Issuer could not be considered the recipient of the services rendered in view of the refinancing structure, the entity is in principle neither liable to remit reverse charged Dutch VAT on the services from foreign (non-Dutch) service suppliers. Nevertheless, the Court argues that the Bond Issuer is still liable to pay the reverse charged VAT on part of the services purchased that it has benefitted from itself, i.e. the services necessary for the issuance of the bonds and the subsequent granting of the loan.

The Court denies the Bond Issuer the right to recover VAT on the costs incurred. Instead of attributing the services rendered to the VAT taxed recharges of costs, the Court concludes that the respective costs relate to the (VAT exempt) granting of an interest-bearing loan to the Portfolio.

Practical impact

Based on the judgment, we notice that several assumptions around the VAT recovery for costs related to liquidity events in private equity structures (e.g. acquisitions, bolt-on acquisitions, sales and refinancing activities) are called into question:

  • As a matter of default, the recipient should be determined on the basis of the description of the invoice issued by the service supplier. However, any proof of circumstances that raise reasonable doubts on who could be considered the recipient of the services supplied, appears sufficient to deviate from this principle.
  • A right to recover VAT exists from the first investment expenditure incurred for an economic activity. In this case, the Court emphasized that if services are rendered prior to establishment, the services should explicitly be purchased on behalf of the start-up company or the latter should have substituted the person with whom the initial engagement is concluded to be qualified as recipient of the expenditures.
  • The case shows that as soon as a VAT taxable person benefits from the services supplied, he can be held liable to report and pay reverse charged VAT even if the taxable person is not the recipient of the respective services in strict sense.
  • This once again emphasizes that in case costs are recharged, this does not automatically mean that the recharges could be seen as a VAT taxed activity granting the recharging entity a right to recover VAT on those costs.


In our view, the outcome of this case again shows the importance to consider which VAT consequences may be associated with the contractual arrangements in place for liquidity events at an early stage, as certainty around cost on-charge structures and novation is deteriorated.

Finally

For more information, please contact your Deloitte VAT advisor or the specialist listed below.

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