PE fund is not entitled to VAT recovery due to lack of VAT entrepreneurship

The District Court of Noord-Holland recently ruled in a case about the recovery of VAT on transaction costs by a private equity fund (PE fund). The PE fund had claimed a VAT recovery and the Dutch Tax Authorities refused this recovery. The court rules that the PE fund must be regarded as the recipient of the services for which costs were incurrent, but that the fund is not entitled to VAT recovery, because the PE fund cannot be regarded as a VAT entrepreneur.


The court has been asked to rule on a dispute between a PE fund and the Dutch tax authorities. The PE Fund (a limited partnership managed by an AIFMD Licensed Manager) acquires, indirectly, through specially incorporated companies (“BidCos”), controlling interests in companies. The PE fund incurred external costs in relation to these acquisitions, whereby the VAT on those costs was recovered by the PE fund. There was a dispute over the artificiality of the contracts entered into by the PE fund and over which entity should be regarded as the recipient of the transaction services. The Dutch tax authority argues that this was an artificial construction solely set-up to obtain tax benefits. The PE Fund disputed this and argued that, as the actual purchaser of the services, it was entitled to recover the VAT on the costs related to those services.

As a VAT entrepreneur, the PE fund performs VAT-taxable services that consist of (1) provision (against remuneration) of the transaction documentation and (2) making supervisory directors available for a fee for the supervisory boards of the purchased companies.

Court judgment

The court has ruled that the contractual provisions correspond to the economic reality. It appears from the agreements and other commercial circumstances that the PE fund is the recipient of the services. Therefore, the content of the contracts must be adhered to.

Nevertheless, the PE fund was not entitled to VAT recovery, because the PE fund is not regarded as a VAT entrepreneur. According to the court, there is only a “pure” on-charge of the transaction costs to the Bidco’s. Such on-charging of costs is not considered an economic activity and therefore does not constitute VAT entrepreneurship. The court further rules that the activities of supervisory directors cannot be regarded as an economic activity, which means that the activities of the PE fund in that area do not lead to VAT entrepreneurship either.

Consequences for Dutch tax practice

In practice, the right to recover VAT on transaction costs often leads to discussions with the tax authorities. This ruling of the court emphasizes the importance of careful consideration for this topic in good time.

The court’s ruling that the PE fund should indeed be regarded as a recipient of the supplies of service is, in our opinion, justified and provides a welcome clarification for the Dutch tax practice. We do believe that the court marginalizes the overall activities, because in our opinion there are also good arguments to substantiate the VAT recovery as a VAT entrepreneur in this case. In our view, the provided transaction support by the PE fund is understated in the court’s ruling. There seems to be much more going on here (based on our experience in practice) than a pure cost allocation. In addition, the court wrongly equates the provision of the supervisory directors here with the actual fulfillment of such a position.

Enough material for further discussion, whereby, even with this ruling in hand, there are still sufficient opportunities for the Dutch practice to effectuate VAT recovery. We will of course follow this case with interest.

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