The Belgian tax code imposes a premium tax (at a rate of 1.1%) for life assurance transactions. These transactions are taxable when the risk is situated in Belgium. The risk is deemed to be situated in Belgium “… if the policyholder has his habitual residence in Belgium …”
RVS is a Netherlands resident life assurance company which has no representatives or place of business in Belgium. It entered into life assurance contracts with a number of individuals who were, at the time the contact was entered into, resident in the Netherlands but who subsequently emigrated to Belgium. These were regular premium contracts. Was Belgian premium tax due in respect of premiums paid whilst these policyholder were resident in Belgium?
It might not be surprising to know that “since the indirect taxation of life assurance transactions has not yet been the subject of harmonisation at European Union level … some member states do not subject assurance transactions to any form of indirect taxation while others apply special taxes and other forms of contribution, the structure and rate of which vary considerably.” Europhiles and europhobes should note the use of “yet”.
It might also not come as a complete surprise to learn that there were two approaches to this issue. The “static” approach championed by Estonia held that the determining factor was the residence status at the moment the contract was concluded. In contrast, the “dynamic” approach championed by Belgium and Austria held that the determining factor was the policyholder’s residence at the time each premium is paid. (Belgium and Austria impose premium taxes – Estonia doesn’t.)
The Court concluded that only the “dynamic” interpretation of the legislation made it possible to ensure that equality of treatment applied. The same tax treatment should apply to an existing contract and to any new contract. This would prevent distortions of competition – a key objective of the Union.
This case is a reminder that the tax rules applying in one jurisdiction won’t necessarily apply in another and that clients should be encouraged to tell their advisers when a change of jurisdiction is in contemplation. The company (RVS) paid the tax "up-front" and then made a repayment claim. The refusal of this claim started us on the long and winding road to Luxembourg.
Gessellschaft fur Borsenkommunikation mBH
GfBK provides information and recommendations relating to stock markets; advice relating to investment in financial instruments and advice on the marketing of financial investments. It entered into a contract with an investment management company to provide advice on the management of a special investment fund, to monitor it, and to make recommendations for the purchase and sale of assets. It was paid on the basis of a percentage of the average monthly value of the fund.
Were its fees subject to VAT? GfBK claimed that the fees were VAT exempt as being “for the management of special investment funds as defined by Member States” – a specific exemption in the tax code.
The Court decided that to qualify for the exemption certain conditions had to be met. The services must “form a distinct whole and be specific to, and essential for, the management of special investment funds”.
There had to be an “intrinsic connection” between the services provided by GfBK and the activity characteristic of a special investment fund. Those services had to have the effect of performing the specific and essential functions of management of a special investment fund.
Management of such a fund included not only the selection and disposal of assets but also accounting and administration services – such as computing the amount of income and the price of units or shares, the valuation of assets, accounting, the preparation of statements for the distribution of income, the provision of information and documentation for periodic accounts and for tax, statistical and VAT returns, and the preparation of income forecasts.
Those persons who invest in securities directly are not liable for VAT. The purpose of the exemption for the management of special investment funds is to facilitate investment by small investors through collective investment undertakings. The exemption ensures that the choice between direct investment in securities and investment through collective investment is VAT neutral.
If investment advice services provided by a third party were subject to VAT, investment management companies (IMCs) with their own in-house investment advisers would have an advantage over IMCs which used external managers. The principle of fiscal neutrality requires that operators must be able to choose the form of organisation which best suits them.
The Court concluded that the exemption was available in respect of the services provided by GfBK.
This decision will be good news for those advisers who use the services of discretionary fund/asset managers on “offshore” bonds though a cost-benefit analysis should still be required.
Gerry Brown is technical manager at Prudential
