Cost-sharing associations ("CSAs") enable their members engaged in VAT-exempt activities not to incur non-deductible VAT on purchases of services from other group members or the CSA itself, as services provided by a CSA to its members are exempt from VAT. The VAT exemption for CSAs is based on Article 13(A)(1)(f) of the Sixth VAT Directive ("the Directive"). However, as the European Commission found that the Belgian implementation of the exemption were not fully in line with the Directive, the Belgian statutory framework was modified by the Act of 12 May 2016 ("the Act") . The new rules will enter into effect on 1 July 2016.
Purpose of a CSA
CSAs are often used by entities engaged in VAT-exempt activities, such as banks, financial institutions, insurance companies, hospitals and other organisations that either fall outside the scope of VAT or perform VAT-exempt activities. Without a CSA, such entities would incur non-deductible VAT when asking a third party to perform certain overhead activities, such as financial services, bookkeeping, HR management, etc. If there is a CSA in place, however, services performed for the CSA by its members are not subject to VAT.
Reason for the modification
In 2015, the European Commission found that the Belgian CSA rules violated EU VAT law and the Directive as, amongst other things, they were introduced by way of a royal decree and circular rather than an act. By means of the Act, Belgium wishes to align the CSA rules to EU law.
Situation until 30 June 2016
The exemption is subject to conditions, found in Article 44(2)(1bis) of the VAT Code, Royal Decree No 43 (the VAT Decree), and the VAT circular of 9 May 1996. In brief, in order to qualify for the VAT exemption, five cumulative conditions should be met:
- the service should be directly required for the tax-exempt activities of the CSA's members;
- the price for the service should cover only the actual cost incurred to perform the service;
- the service should be performed for CSA members only;
- all CSA members should belong to the same financial, economic, social or professional group;
- at least 90% of each CSA member's annual turnover should be exempt from or not subject to VAT; and
- the activities should not lead to unfair competition (with respect to market players subject to VAT that are obliged to charge VAT on their services).
The 1995 circular defines two types of CSAs:
- CSAs established as a separate legal entity or acting as an independent entity ("Type I CSAs");
- CSAs which are not separate from their members and do not constitute an independent entity ("Type II CSAs").
The new rules will have a substantial impact on Type II CSAs (see below).
Situation after 1 July 2016: more relaxed conditions
Further to comments made by the European Commission, the CSA rules are now set out in the Belgian VAT Code (new Article 44(2bis). Both the VAT Decree and (most likely) the VAT circular of 9 May 1996 have been abolished.
Only Type I CSAs will still qualify for the VAT exemption. Consequently, Type II CSAs should be modified and brought into line with the new rules (the implementation of which will most likely be described in a new circular).
Certain conditions to be met by CSA (members) have been relaxed:
- CSA members need no longer belong to the same financial, economic, social or professional group;
- activities that fall outside the scope of VAT or are exempt from VAT must now account for only a predominant share (i.e. more than 50% and no longer 90%) of a CSA member's activities; questions have already been raised about this requirement as the Commission has apparently disallowed such thresholds;
- the exemption only applies to services provided to CSA members insofar as these services are directly required for activities that are VAT exempt or that fall outside the scope of VAT; as of 1 July 2016, a CSA can also provide services to non-members, provided a predominant share (i.e. more than 50%) of its services are provided to members; it should be noted that services which are not "directly required" for an activity that is VAT exempt or not subject to VAT do not qualify for the exemption (e.g. catering services for CSA members' personnel).
The other conditions are unchanged :
- the price for the service should cover only the actual cost incurred to perform the service; and
- the activities should not lead to unfair competition.
Points to keep in mind
- While the requirements for the exemption are now defined by the Act, implementing and interpretative measures will most likely be set out in a royal decree and new circular before the end of the year.
- As of 1 July 2016, a CSA can be a mixed VAT payer, i.e. an entity providing services that are subject to VAT and services that are exempt from or fall outside the scope of VAT.
- Type I CSAs should bear in mind two things: (i) it may now be possible to claim back previously non-deductible VAT on services provided to non-members and (ii) reporting obligations should be complied with before 31 July 2016.
- The foregoing also holds true for Type II CSAs. Moreover, there is a risk of losing the VAT exemption if steps are not taken to become a Type I CSA before 31 December 2016, although the future circular may extend application of the VAT exemption.