On 23 February 2016, the Advocate General of the Dutch Supreme Court concluded that a pension fund with a defined benefit scheme can qualify as a special investment fund; the management of which is exempt from VAT. This is contrary to the Dutch state secretary's policy stating that a pension fund with a defined benefit scheme by definition cannot qualify as such.
In the case at hand the asset manager invests and manages the assets of the pension fund with a defined benefit scheme against payment of compensation and the dispute concerns whether the management services to the pension fund benefit from the VAT exemption for management of special investment funds.
To qualify as a special investment fund, the fund must be in competition with collective investment undertakings as defined by the UCITS Directive. According to the AG, the pension fund must meet the following criteria given by the ECJ to determine whether it constitutes as a special investment fund:
- There must be specific State supervision;
- The funds must be funded by the persons to whom the retirement benefit is to be paid;
- The savings must be invested using a risk spreading principle;
- The participants bear the investment risk.
Parties are in dispute on the last requirement of investment risk. According to the Dutch policy, participants therefore do not bear the investment risk because the payment to the participants is fixed - benefits are predetermined based on the amount of earnings during a specified number of years.
The AG comes to a different conclusion than the state policy. According to the AG the decisive factor should be who bears the risk if it materializes. The AG mentions non-indexation and decreasing pension benefits as indirect investment risks, which are prominent effects of bad investment results. These indirect investments risks qualify as investment risk carried by the pension customers.
The AG concludes that the pension fund with a defined benefit qualifies as a special investment funds within the scope of the Dutch VAT exemption because it meets al four criteria. The consequence of this qualification is that the provided management services by the asset manager to the pension fund will be exempt from VAT. In most cases this results in cost savings as pension funds cannot (fully) recover input VAT. Pension funds and their managers in the Netherlands and throughout Europe should review defined benefit schemes and reconsider their VAT position.