VAT recovery on transaction costs for PE fund denied

06/06/23

In the Netherlands there is an ongoing discussion as to whether private equity structures should be allowed to recover VAT on fund expenses and, in particular, transaction costs. On 27 April 2023, the court of Noord-Holland decided that a private equity fund which concluded so-called ‘structuring and support agreements’ with its Bidco entities and made available supervisory board members to these Bidco entities against remuneration, does not qualify as a VAT taxable person and is not allowed to recover VAT on any costs for that reason. Specifically, the court considered that the underlying third party services were already consumed at the level of the private equity fund in the investment decision making process before the Bidco entities were incorporated.

As regards the provisioning of supervisory board members to the Bidco entities, the court concluded that this took place in the capacity of shareholder and is therefore not relevant for VAT. It remains to be seen though whether the court of appeal will judge in a similar way.

What does this mean for your organization?

The decision of the court creates uncertainty in respect of the VAT recovery of transaction costs and is likely to have the most impact on organizations which engage regularly in M&A activities, such as private equity funds. We expect that the decision will result in more discussions with the Dutch tax authorities regarding the VAT treatment of transaction costs. As a result, alternative ways of structuring transaction costs may be explored and applied more frequently. Another potential consequence of the decision is that a recharge of transaction costs to a Dutch Bidco entity from abroad might not result in reverse charge VAT being due at the level of the Dutch Bidco entity since it – following the court’s decision – would be outside the scope of VAT. We strongly advise companies engaged in M&A activities to contact us or their regular PwC VAT advisor to discuss the impact of this court decision on their activities and the best way of dealing with this.

Background

The case at hand concerned a Dutch private equity fund (Dutch limited partnership, commanditaire vennootschap) which charged two types of fees to the Bidco entities it incorporated in case of envisaged deals. One-off transaction fees to cover the expenses incurred by the fund in connection with preparing the transactions that would be entered into by the Bidco entities. And annual fees for making staff available to act as supervisory board members at the level of the Bidco entities. The fund concluded structuring and support agreements and board fee agreements with the Bidco entities and issued invoices with VAT in respect of both types of fees. The fund filed periodical VAT returns in which VAT on transaction costs was recovered. The Dutch tax authorities challenged the recovery of VAT on various grounds, namely that the fund does not engage in any economic activities, should consequently be disregarded for VAT purposes and all activities and costs should be attributed to the manager of the fund since the agreements concluded between the parties do not reflect economic reality in their view.

Although the court did not follow the Dutch tax authorities’ reasoning that the fund should be disregarded for VAT purposes and that all activities and costs should be attributed to the manager of the fund, the court did decide that the fund did not engage in any economic activities for VAT purposes and therefore was not entitled to recover VAT. Specifically, the court considered that the underlying third party services were already consumed at the level of the private equity fund in the investment decision making process before the Bidco entities were incorporated. The provisioning of the deliverables of the third party service providers (i.e. advices, transaction documentation and due diligence reports) by the fund to the Bidco entities against payment of a fee that corresponded with the transaction costs incurred by the fund, is therefore not an economic activity in view of the court. The court concludes that even in case the provisioning of these deliverables should be considered relevant, the strong disconnect between the height of the transaction costs on the one hand and the alleged limited value of these deliverables for the Bidco entities on the other hand, should lead to the conclusion that no economic activities are performed by the fund. This based on the assumption of the court that these deliverables are only used by the Bidco entities for the obtaining of external funding to finance the acquisition of the shares in the portfolio companies.

As regards the provisioning of supervisory board members to the Bidco entities, the court concluded that this took place in the capacity of shareholder and is therefore not relevant for VAT.