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ATP wins landmark VAT case against Danish tax authority [updated]

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Danish pension provider ATP has won its case against its tax authority over whether occupational defined contribution (DC) management costs should be exempt from VAT charges, in a ruling by the European Court of Justice (ECJ).

Following the advice of its Advocate General, the ECJ today ruled that DC schemes, under certain conditions, can be classed as special investment funds (SIFs), thus exempting the management costs from VAT.

ATP, which administers DC pension funds in both investment and administration, mainly for PensionDanmark, challenged its tax authority, Skatteministeriet, suggesting it should not be charging its clients VAT for its services.

This is based on the notion that DC funds, unlike defined benefit (DB) schemes, share enough characteristics with UCITS funds and SIFs to receive similar tax treatment.

In a landmark ruling for the DC industry, the ECJ has agreed with this view and said ATP should not be charging VAT to its clients for investment and administrative services.

This also includes the cost of payment services it provides to scheme members.

The Court, however, has placed certain conditions on DC schemes for this VAT exemption, centralised around risk sharing betweem the member and employer.

In his opinion to the Court late last year, the Advocate General, Pedro Cruz Villalón, concluded that DC funds do share characteristics with UCITS funds and fulfill the purpose of the directive’s original exemption.

As the Court’s highest adviser, he said that the VAT exemption applied to UCITS and SIFs in general must also apply to occupational DC funds, where pooled assets are spread over a range of securities.

However, he stipulated it should only be case where the beneficiary, and owner of the assets, bears all the risk of the investment, as is the case in pure-DC funds.

This was always the key debating point in previous challenges over occupational pension schemes paying VAT on management costs.

In a previous case brought by the Wheels Common Investment Fund, backed by the UK’s National Association of Pension Funds (NAPF), the ECJ ruled in favour of the UK tax authority and said DB schemes could not be exempt from VAT, as the beneficiary neither owns the assets, nor bears all the investment risk.

In today’s ruling, the Court said member states should exempt VAT on DC funds without prejudice, providing said funds meet certain criteria.

It listed the following charges to be exempt: “Transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring and management of special investment funds as defined by member states.”

PensionDanmark, one of the biggest winners from today’s ruling, said it was pleased with the verdict.

Maj-Britt Klemp, head of tax at the scheme, said: ”We are obligated to give our members the best possible conditions and thereby manage our members’ savings at the lowest possible cost. PensionDanmark is a member owned pension fund and a VAT exemption will thereby benefit the members.”

The win for ATP brings to a close a number of cases between tax authorities and occupation pension schemes and sponsors.

In a landmark ruling for DB scheme sponsors, Dutch company PPG won its case against the Dutch government, with the ECJ ruling that companies that pay for investment management costs of DB schemes should also be exempt from VAT charges.

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