Supreme Court: VAT deduction rules for market makers

Recently the Supreme Court issued an important judgment on the scope of the right to recover input VAT for a market maker trading in financial instruments on stock exchanges. The case revolves around the questions of how securities transactions must be taken into account when determining the partial exemption VAT recovery method for mixed costs (“PESM”) where an unknown proportion of the counterparties to those transactions are established outside the European Union. Furthermore the case revolves around the question whether transfer pricing payments to foreign group companies can be considered remuneration for a supply and as such must be included as turnover with a right to recover in the PESM. The Supreme Court referred the case to a Court of Appeal for further factual analysis.

The main dispute

The core of the dispute concerns the calculation of the PESM. The taxpayer had previously agreed with the Tax Inspector on an allocation key based on nominal trading volumes on exchanges inside and outside the EU, applied to the gross trading result. After these agreements expired, the taxpayer wanted to include the TNMM fees and RPSM payments as additional supplies giving right to VAT recovery in the PESM. The tax authorities refused this suggestion.

The Amsterdam Court of Appeal held that the agreements with the tax authorities covered all activities of the market maker and that, in order to include the services to the subsidiaries in the allocation key, the taxpayer would have to revert entirely back to full application of the law. According to the Court of Appeal, the taxpayer had not provided sufficient numerical evidence for this.

The Supreme Court’s judgment 

The Supreme Court finds that although the Court of Appeal rightly held that, after the expiry of the agreements, the full application of the law applies, it failed to recognise that under such full application the taxpayer had taken the position that the consideration for securities transactions could be determined, by analogy, with the judgment First National Bank of Chicago (CJEU 14 July 1998, C‑172/96). The Court of Appeal should have addressed that argument.

The Supreme Court considers that where the circumstances under which securities transactions are carried out are comparable to the foreign exchange transactions in the FNBC case, it is beyond reasonable doubt that the taxable amount can by analogy be determined as the gross result of the transactions in a given period.

In addition, the Supreme Court gives important guidance on the burden of proof when recovering VAT attributable to exempt supplies to non‑EU customers. The burden of proof regarding the place of establishment of customers outside the EU lies with the taxable person. Because neither the VAT Directive, nor the Implementing Regulation, nor the Dutch Turnover Tax Act contains specific rules of evidence for this situation, market makers may submit anything available as evidence. In specific circumstances where it is not possible, on the basis of objective data, to determine the place of establishment for each customer, the EU/non‑EU ratio may also be demonstrated on the basis of reasonable estimates, provided that the data used are accurate, reliable and up‑to‑date.

The case has been referred to The Hague Court of Appeal for further handling. The referring court must, among other things, decide how to determine what proportion of the customers for the securities transactions can be deemed to be established outside the EU, and whether the residual profit split payments must be regarded as consideration for services rendered to the subsidiaries.