Netherlands: Policy statement on VAT fixed establishments reflects position change

Cross-border transactions within a legal entity may be subject to VAT if this entity is a member of a VAT group in a different country

Policy statement reflects position change

With a change to the Dutch policy statement on value added tax (VAT) fixed establishments, published 5 July 2022, cross-border transactions within a legal entity may be subject to VAT if this entity is a member of a VAT group in a different country.

The policy statement’s effective date is 1 January 2024.


The question whether a transaction within a legal entity can be VAT-taxed if it is conducted between branches in different countries has debated for years.

The Dutch Supreme Court (Hoge Raad) in June 2002 held that the answer to this question is “no” if a foreign legal entity is a member of a Dutch VAT group via a Dutch VAT fixed establishment. In its judgment, the Supreme Court opined that the Dutch VAT group comprises the entire legal entity—i.e., both the Dutch fixed establishment and the foreign head office.

The Court of Justice of the European Union (CJEU) in its judgments in the Skandia case (no. C-7/13) and the Danske Bank case (C-812/19) called this Dutch line of reasoning into question. In those cases, the CJEU concluded that a VAT group constitutes a separate taxable person that is not linked to any foreign fixed establishment or a foreign head office. 

Policy statement

The Deputy Minister of Finance decided to change course by abandoning the line of reasoning that was initiated by the Supreme Court in 2002.

The question of how to treat a VAT group if it is located outside the EU remains unanswered in the CJEU judgments. Few EU Member States have adopted policies in this regard. For instance, the Italian tax authorities decided in 2021 that a UK-based VAT group would be qualified as a separate taxable person when it concerned services provided from an Italian fixed establishment.

The Dutch Deputy Minister of Finance took a different approach. In the policy statement, the term “VAT group” is defined as a VAT group that is located in an EU Member State. It is clear from the explanatory note that the policy statement does not apply to non-EU-based VAT groups.

KPMG observation

The fact that the change is affected by amending a policy statement does raise some questions, however, since the Supreme Court based its reasoning on as yet unamended Dutch legislation. It is impossible for a policy statement to set aside this legislation. This may lead to new legal proceedings going forward.

The change to the policy statement in principle affects every taxable person that has a combination of fixed establishments and VAT groups in the EU. That said, the matter will have the greatest impact on taxable persons with a limited VAT recovery right—such as financial institutions and insurance companies—because they can also expect financial consequences.

It seems to follow from the explanatory note to the policy statement that the Deputy Minister of Finance is aware of the impact of this policy change. Given that the amended policy statement will not be effective until 1 January 2024, taxable persons will have the opportunity to prepare for the change, especially in terms of their systems.

Potentially affected taxpayers need to consider the implications of the policy change and identify which cross-border transactions will be affected and which will not be affected by the change in VAT treatment. Not every cross-border payment will be subject to VAT. To determine the consequences, taxable persons need to work out, for instance, to what extent their branches qualify as fixed establishments for VAT purposes, and then determine which VAT groups there are and assess transactions for whether or not there are any underlying supplies of goods or services taking place against consideration. If so, these may also be exempt. The systems processing is relevant in this regard; this also applies to taxable persons who only conduct VAT-taxed transactions.

After the relevant transactions have been mapped out, it is important to determine the VAT recovery right. For instance, there may be Dutch taxable persons that mainly perform activities for foreign fixed establishments that could actually benefit from the implementation of the new policy because it may increase their VAT recovery right. In those situations, an earlier implementation of this policy can be used as a reference point. The fact that the policy statement will be effective 1 January 2024 seems to point to approved policy, while the relevant basis was provided earlier by the CJEU.

Finally, there is scope for reflecting on solutions. Given that the line of reasoning in the Skandia and Danske Bank judgments was previously implemented in countries other than the Netherlands, tax professionals are seeing that VAT losses can be mitigated because of changes in the business model and/or the transfer pricing method.

Read a July 2022 report prepared by the KPMG member firm in the Netherlands


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