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Netherlands: VAT group rules broadly interpreted by Dutch Supreme Court

Netherlands: VAT group rules broadly interpreted

The Dutch Supreme Court (Hoge Raad) in early July 2019 issued two judgments broadly interpreting the economic interdependence standard required when entities or persons seek to function as a single tax entity for value added tax (VAT) purposes.


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The economic interdependence required to invoke the VAT group rules raises certain questions, and it has been challenging to measure such economic interdependence (rather than the financial and organizational interdependence required for a VAT group).

The high court’s application of a broad scope of economic interdependence in two judgments is important for parties with a limited VAT deduction right—such as education and healthcare institutions, banks, insurers, and, under certain circumstances, holding entities.

Court’s judgments

In both cases before the Dutch Supreme Court, educational institutions operating as foundations had established private limited companies (BVs) to support them with a secondment of staff and cleaning services. The foundations wanted to form a fiscal group with those companies because they did not want to be subject to VAT unnecessarily. The foundations believed that they satisfied all the VAT requirements for entering into a tax entity. The tax authorities, however, disagreed.

The high court on 5 July 2019 issued judgments in favor of both educational institutions.

  • In the first case, the Supreme Court held that the non-economic activity carried out by the foundation (here, education funded from general government resources) was not an obstacle to being able to participate in a VAT group with a subsidiary (even if the support from the subsidiary was, to a large extent, related to the education that would be regarded as a non-economic activity). The Supreme Court found that services provided by an entrepreneur to another entrepreneur, that are useful to the non-economic activities of the second entrepreneur, must be taken into account when assessing whether there is economic interdependence between the two entrepreneurs.
  • In the second case, the Supreme Court found that, for economic interdependence, it is sufficient to maintain mutual economic relations that are not negligible. This would apply not only in the situation of groups consisting of a holding company and operating companies, but also in other cases. According to the Supreme Court, this condition was met in the case before it because the subsidiary BV provided more than 27% services to the education foundation. The Supreme Court therefore affirmed its position from a 2013 case.

KPMG observation

The judgments may have implications for entrepreneurs with a limited right to deduct VAT, and thus may afford opportunities with respect to the VAT liability for mutual transactions and VAT deduction rights. Maintaining mutually non-negligible economic relations is a practically applicable requirement for economic interdependence, and given that the Supreme Court confirmed that the performance of non-economic activities, in addition to economic activities, is not an obstacle to participation in a VAT group.

The judgments offer good news for education and healthcare, and also for companies and institutions that, in addition to their (economic) entrepreneurial activities, undertake activities funded by subsidies (non-economic). This also applies to holding companies that, in addition to management or other services, also participate passively in other companies (non-economic activities) for a fee in participating interests (economic activities).

The broad explanation of the VAT group rules may allow entities to reduce their administrative costs and provide a cash-flow advantage because no VAT invoices must be issued between entities.

The formation of a VAT group always requires that the participants are not only economically but also financially and organizationally intertwined. When assessing the possibility of using the VAT group rules, there must be consideration of the specific facts and circumstances. Note that under the VAT group rules, the entities are jointly and severally liable for each other's VAT debts.

Read a July 2019 report (Dutch) and (English) prepared by the KPMG member firm in the Netherlands

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