Netherlands: VAT on professional services deductible | KPMG | GLOBAL
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Netherlands: Is VAT on professional services deductible when sale fails?

Netherlands: VAT on professional services deductible

The Court of Justice of the European Union (CJEU) has cases pending before it concerning, in one case, whether the value added tax (VAT) on professional services is deductible if the proposed takeover of a participation is ultimately unsuccessful and in another case, whether VAT on due diligence that is performed for a proposed, but ultimately unrealized, sale of shares in a subsidiary is deductible.


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In the Netherlands, the outcome of these cases could affect private equity firms and merger and acquisition (M&A) practices within groups, if the CJEU renders a judgment that differs from the current Dutch practice.

Current Dutch practice

In the Netherlands, VAT on preliminary services is generally deductible if the intended sale of a participation ultimately does not proceed, provided the holding company performs services for that participation that are fully subject to VAT, or the participation, together with the holding company, is a member of a VAT group that only performs VAT-taxed services. The relevant participation in both situations is that:

  • It is held in the ‘business context’ of the holding company, and
  • What would be a VAT-exempt sale ultimately does not eventuate.

In this situation, the preliminary expenses do not relate to a VAT-exempt sale of a participation, but are related to the entire business activity of the holding company. As a result, the preliminary expenses are deemed to be part of the general overhead. This means that for the purposes of the VAT deduction entitlement on these expenses, all the business activities of the holding company are, in principle, taken into account—both the VAT-exempt services (such as the provision of interest-bearing loans) and the VAT-taxed services (such as management services). Only if the holding company actually uses services for a VAT-exempt sale of the participation, can the VAT deduction be limited, but even then not in all cases.

For example, in the case of the sale of a participation—one that falls within the economic scope of the selling holding company—to a purchaser that is resident outside the European Union, there is an entitlement to a VAT deduction. It is also possible to recharge the preliminary expenses (or some of these) with VAT to an affiliated party, and this recharging must be treated as a taxed service for VAT purposes. Other situations are also conceivable in which there is an entitlement to deduct the VAT on preliminary expenses in the case of a VAT-exempt transfer.

However, if the holding company holds its participations passively or its normal VAT deduction entitlement is limited as a result of VAT-exempt or non-economic activities, then there must be account taken of the fact that the VAT on preliminary expenses for a proposed sale may be non-deductible. Moreover, in practice a dispute could arise with the Dutch tax authorities about who the purchaser of the preliminary services is.

CJEU judgments, possible implications

It is possible that the CJEU may approach the request for a preliminary ruling, in principle, along the lines of the deemed general overhead and arrive at a VAT deduction entitlement in the case concerning due diligence expenses in accordance with the taxpayer’s normal business activities. In that case, the judgment rendered by the CJEU would correspond to current Dutch practice. 

However, there is also the possibility that the CJEU could take a slightly different course, looking beyond the earlier judgments and asking to what extent the preliminary expenses would actually be included in the price that the holding company charges its participation for its VAT-taxed services. It is also possible (although this does not appear to be at issue) that the CJEU could focus on the question of which entity within the group is actually the purchaser of the preliminary services. In short, it does not appear possible to entirely predict the outcome in this case.

KPMG observation

The outcome of these cases could be particularly significant to, for example, private equity firms and the M&A practice within groups. Entities intending to sell participations need to consider reviewing their VAT position and investigate at an early stage:

  • Whether the preliminary expenses are received at the right level within the group
  • Whether the holding company acts within the economic sphere when selling participation(s) and whether there are VAT-taxed services in respect of the participation(s), or whether there is a VAT group

Depending upon the actual situation, steps may need to be taken to optimize the recovery of VAT as much as possible, even if the sale does not proceed.

Entities that are currently consulting with the Dutch tax authorities about the possibility of deducting the VAT on preliminary expenses, and if supplementary assessments have been or will be imposed, the taxpayers may need to consider filing a notice of objection in order to preserve their rights. In some instances, it may be advisable to await the release of the CJEU judgment. 


Read an October 2017 report prepared by the KPMG member firm in the Netherlands

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