Non-taxable person owes reverse-charged, non-deductible VAT on foreign services

A holding company with no economic activities nevertheless held a VAT identification number. That led to an assessment of more than € 600,000 in reverse-charged, non-deductible VAT on services bought in.

Non-taxable persons are in principle not concerned with declaring VAT: without economic activities there is no liability. Think of a holding company that merely holds shares and does not invoice its subsidiaries for management services in connection with active involvement in their management and policy. Such a holding company also has no need for an active VAT identification number.

The facts

In a recent ruling of the Court of Appeal in Amsterdam, such a holding company turned out to have one. The entity had been registered as required to file returns since its incorporation in 1987, but since 2009 its activities in the commercial register had been changed to financial holding, holding and financing activities. The Dutch Tax Administration therefore converted the existing number into a VAT identification number for a business making exempt supplies, and informed the holding company of this in 2010. In 2012 the company received a questionnaire, which it completed and returned without stating that it made no supplies for consideration.

The holding company then bought services from suppliers in the EU, giving them its own VAT identification number. Any VAT-registered entity thereby falls under the B2B general rule: services bought in are taxed in the customer's member state. Where the supplier is established outside that member state, the reverse charge applies immediately and the holding company must declare Dutch VAT at 21%. Because it makes no taxable supplies itself, that VAT is not deductible. The company declared nothing, and the tax authorities assessed more than € 600,000.

The ruling

Following the District Court of Noord-Holland, the Court of Appeal took into account that the tax authorities had informed the holding company of the registration, so that it could immediately have pointed out that their conclusion was wrong. It failed to do so. The onus therefore lies with the holding company: it must act itself where a VAT identification number has been issued on a mistaken basis.

Had no valid number been issued, the EU suppliers would have charged local VAT and the holding company would have paid VAT in any event. With suppliers outside the EU the position can be different.

Why this matters in practice

We still regularly see incoming invoices from foreign suppliers to which the reverse charge is mandatory being left out of the VAT return, on the basis that "there is no VAT on the invoice". As this case shows, that can lead to substantial assessments where the recipient cannot deduct in full.