Tax entity for VAT purposes? Check regularly whether the requirements are met

9 September 2019 - Entrepreneurs who in organisational (administrative), economic and financial terms are closely linked, form a tax entity for VAT purposes. In that case, they act as if they were one VAT entrepreneur. The parties may not invoice VAT to each other; if they so desire they may submit joint VAT returns. This may be very beneficial, for instance when the client does not have a (full) right to deduct VAT. In order to qualify as a tax entity, the parties should be sufficiently intertwined and meet a number of requirements. It is important for the entrepreneurs concerned to check on a regular basis that they comply with the requirements and that they are still sufficiently intertwined.

Risk of an additional VAT assessment

If the requirements are no longer met because the entrepreneurs are insufficiently intertwined, the Tax and Customs Administration may state that the tax entity for VAT purposes has ceased to exist. This may lead to an additional VAT assessment. Moreover, an adjustment may be imposed even if the Tax and Customs Administration previously confirmed the tax entity in a reassessment decision in writing.

Reassessment decision tax entity

In practice, intertwined entrepreneurs often request the Tax and Customs Administration to designate them by reassessment decision as a tax entity for VAT purposes. This possibility arises from the (Dutch) Turnover Tax Act 1968. Once the reassessment decision has been issued, the entrepreneurs in the tax entity are jointly and severally liable for each other's VAT debts by virtue of the Collection of State Taxes Act 1990.

Recent developments

However, having a reassessment decision does not guarantee that the Tax and Customs Administration will also recognise the tax entity for VAT purposes if, at a later date, it transpires that the required intertwinement in fact no longer exists. If, in the opinion of the Tax and Customs Administration, the tax entity has ceased to exist in the past, the Tax and Customs Administration may therefore, despite its reassessment decision, recover VAT for the later period (up to approximately five years), and also charge interest and tax penalties.

If the Tax and Customs Administration subsequently considers that the tax entity decision for VAT purposes was wrongly issued at the time, it may take the view that the tax entity did not exist from the outset. From the date of the reassessment decision, calculation and declaration of VAT was then wrongly omitted. This VAT is then still due.

On 24 May 2019, the Den Bosch Court of Appeal ruled, partly with reference to the European VAT Directive, that this view of the Tax and Customs Administration is correct. In the proceedings, the interested party unsuccessfully invoked the confidence he believed he could derive from the reassessment decision that there was a tax entity for VAT purposes in place. According to the Court of Appeal, the reassessment decision only served to secure joint and several liability for VAT debts. The interested party has now lodged an appeal in cassation with the Supreme Court against the judgement.

Ensure continuous monitoring

If, at any time, the degree of intertwinement changes, a reassessment decision on a tax entity for VAT purposes does not provide protection for entrepreneurs if they wrongly continue to act as a tax entity. It is therefore important for these entrepreneurs to periodically investigate - or have investigated - whether they are still sufficiently intertwined with each other. This way they may limit the risk of the Tax and Customs Administration unexpectedly imposing an additional VAT assessment.

Want to know more?

Would you like to know more about the possibilities and impossibilities of forming a tax entity for VAT purposes? If so, please contact Frank van Rijn by e-mail or by phone: +31 (0)88 277 12 76 or Sander van Kreijl by e-mail or by phone: +31 (0)88 277 23 12. They will be pleased to help.