VAT liability for security holders will be introduced per 2018 in the Netherlands. In case a security holder forecloses on mortgaged or pledged assets and receives the proceeds, including the VAT amount, the security holder will become liable for that VAT amount towards the Dutch tax authorities.

As a general rule, VAT is levied from the VAT entrepreneur making the supply of goods or services. An exception is made for an enforcement sale of mortgaged or pledged assets to a VAT entrepreneur. In that case, the liability to pay VAT is shifted to the recipient of the goods (‘reverse charge mechanism’), as a result of which the security holder can seek recovery on the proceeds exclusive of VAT.

If the buyer of the mortgaged or pledged goods is not a VAT entrepreneur, the reverse charge mechanism cannot be applied. In practice this means that the security holder can seek recovery on the proceeds inclusive of VAT. If the security holder defaults on his VAT payment obligation, a shortfall for the Dutch tax authorities would occur.

The proposed legislation seeks to prevent the shortfall of VAT by introducing an individual VAT liability for security holders. We expect that this will have significant consequences for security holders, as the proceeds from which they could seek recovery may exclude the VAT included therein. It stands to reason that the Dutch tax authorities will often rely on this new VAT liability scheme.