A cost sharing association allows taxpayers who have no right or only a limited right to deduct input VAT to cooperate without an increased VAT burden. Following comments from the European Commission with regard to the compatibility of the Belgian legislation with the VAT Directive, the Belgian legislator has amended the legislation and the conditions under which taxpayers can benefit from this regime. The new legislation will enter into force on 1 July 2016.
Background
In the VAT system there are a number of actors, such as hospitals, banks and insurance companies, which do not have to charge VAT on their services. On the other hand, these actors cannot recover the input VAT they pay on the purchase of goods and services. The outsourcing of certain activities to a third party will therefore generally result in an increased VAT cost for these actors.
With the VAT exemption for services rendered by cost sharing associations ("CSAs"), also called "umbrella organisations", the (European) VAT legislator aims to remedy this situation. The purpose of this VAT exemption is to avoid the situation where an entity offering certain services should have to pay (non-deductible) VAT when it has found it necessary to cooperate with other entities by means of a common structure set up to undertake activities essential to the provision of those services (ECJ, 11 December, 2008, C-407/07, SCBIT). The CSA is therefore a structure which is commonly used within the banking and insurance sector, but also within the health sector, with a view to pooling certain intra-group services.
Current regime
In the Belgian context, the application of the exemption for services rendered by a CSA to its members is subject to certain conditions. One of the conditions is that all members of the CSA either perform the same type of activity or belong to the same financial, economic, professional or social group. The services of the CSA must relate directly and exclusively to the exempt or non-taxable activity of its members. This means, according to the Belgian Court of Cassation, that the exemption is not applicable if the CSA also provides services to third parties (Cass. 2 April 2009). The fees charged by the CSA to its members may not include a profit margin, but must represent the exact reimbursement of their share of the joint expenses of the CSA.
New regime
The European Commission expressed doubts as to the compliance of Belgian legislation with the VAT Directive. The Belgian legislator therefore adapted the conditions under which the services rendered by a CSA to its members are exempted from VAT.
The main characteristics of the new legal framework can be summarised as follows:
- The members of the CSA must carry out a VAT-exempted or non-taxable activity which represents a preponderating part of their entire business. It is no longer required that members carry out the same type of activity or that they belong to the same financial, economic, professional or social group.
- The CSA must provide services to its members which are directly related to their exempt or non-taxable activity. Henceforth, a CSA will also be able to provide services to non-members (it being understood that these services are subject to VAT) without losing the exemption in relation to the services rendered to its members. However, in such cases, it is still required that the provision of services to its members represents the main part of the activity carried out by the CSA.
- As is the case under the current regime, it is necessary that the fee charged by the CSA to its members represents the exact reimbursement of their share of the joint expenses of the CSA. Moreover, this condition also applies to the services rendered to third parties, where no profit is accepted either.
- Finally, the exemption should not cause any distortion of competition. This condition already applied to CSAs, but often remained a dead letter in practice. It is expected that, under the new regime, this condition will receive a more substantial interpretation.
This new regime, broadening the scope of application of the VAT exemption for CSAs, will enter into force on 1 July 2016.
Reporting obligation
The new legal framework also imposes specific reporting obligations, although the administrative formalities to be respected in this regard still have to be determined.
For example, within one month after commencement of its activities, a CSA will have to file with the local VAT authorities a list of its members and an overview of the nature of their activities. For CSAs that already exist on 1 July 2016, a transitory regime will be provided; in principle, these CSAs should be given until 31 December 2016 to provide the aforementioned information to the VAT authorities. In addition, the CSA will also have to report any changes in relation to its members and the activities carried out by the CSA and/or its members.
Pending issues
As it is the case under the current regime, the new regime only applies to a CSA that has been established in the form of an association incorporated as a separate legal entity, or an association without legal personality acting under its own name as an autonomous entity towards its members and third parties.
In its circular letter of 9 May 1996 concerning CSAs, the VAT authorities also discuss, in addition to the current regime applicable to CSAs, the VAT regime for so-called "joint ownership", i.e. an association without legal personality which does not act under its own name and which cannot be regarded as an autonomous entity differing from its members. Such "joint ownership", which from a more technical point of view does not fall within the scope of application of the exemption regime for CSAs, also allows, in an even more flexible manner, cooperation between its members without an additional VAT cost. Therefore, such "joint ownership" is often used in practice as an alternative to a CSA. The question arises whether the VAT authorities will still tolerate such "joint ownerships" once the new legal framework has entered into force. It is recommended that some clarification regarding this issue should be provided in the administrative circular letter, which is currently being prepared, in which the VAT authorities will explain the scope of the new regime applicable to CSAs.