Redrafting VAT exemption for cost-sharing associations - action required

Belgian VAT law provides a specific exemption for cost-sharing associations, enabling groups of entities that have VAT exempt or out of scope activities to recharge costs without VAT. This VAT exemption is subject to strict rules that are outlined in a Royal Decree n° 43 and an administrative circular letter of 9 May 1996.

In brief, the current rules provide for two types of cost-sharing associations (CSA): a CSA that is organised as a separate legal person (type I) and a CSA that is organised as a “group” without legal personality (type II). Type II is a kind of “joint ownership” of common means between the members, which in practice is a more flexible way to organise the cost-sharing of joint expenses (including the costs of common personnel).

Following EU Commission questions about the EU compatibility of the current VAT exemption for CSA, the Belgian government has decided to change the current exemption. This redrafting has resulted in the following changes:

  • The current exemption in the VAT law has been redrafted. Royal Decree n° 43 and the old administrative circular letter are now abolished.
  • On the one hand, the VAT exemption has been made more flexible. There is no requirement anymore that members should be part of the same financial, economic, social or professional group. Furthermore, members are no longer required to have an activity that is fully VAT-exempt or out of scope of VAT (in the past, there was a tolerance of 10%). It is sufficient that the main activity of the members is VAT-exempt or out of scope (i.e. more than 50% of incoming transactions). Finally, a CSA can also supply services to non-members as far as the main activity covers cost-sharing for members (more than 50% of the CSA’s total incoming transactions).
  • On the other hand, the conditions for applying the exemption have become stricter. The VAT exemption will only apply for the sharing of costs that are “strictly” necessary for the VAT-exempt or out of scope activities. As such, costs that are linked to private use are excluded. This raises, for example, the question whether VAT exempt cost-sharing is still possible for costs in connection with benefits in kind of (common) personnel. Furthermore, the current type II CSA is abolished. A CSA without legal personality remains possible but it should now be clear that this CSA is organised as an independent association with its own name. The VAT authorities should explain how this will work in practice in a new circular letter. According to our infromation a CSA without legal personality will still be able to share the costs of common personnel but this should be confirmed in the new circular letter.

The new legislation requires disclosure of a CSA to the VAT authorities, to check if the CSA does not distort competition. Importantly, existing CSAs should also be disclosed, in principle before 1 August 2016! This disclosure includes a list of all members and a description of the activities of the members.

Also, it is possible that existing CSAs will become mixed taxpayers under the new rules if a part of their activities would no longer be VAT exempt. This will enable existing CSAs to partially recover input VAT and to adjust VAT recovery for investments in the past.

Therefore, the new rules require immediate action for existing CSAs, including preparation of disclosure of the current CSAs to the VAT authorities, a detailed review of the current CSAs and, probably, adapting CSAs to the new rules. This will mainly be relevant for existing type II CSAs (group without legal personality).

The VAT authorities are currently drafting a detailed circular letter explaining these new rules and providing for practical guidelines. Amongst others, it has been agreed that existing CSAs can continue until the end of this year. After this date the CSA must comply with the new rules. As such, there is still some time in adapting current CSAs to the new rules.

We have been informed that the circular letter will be published by the end of this month. In the meantime, however, existing CSAs must already prepare a disclosure file to the authorities before 1 August 2016.

Source: Act of 26 May 2016 amending the VAT code as regards the exemption for the provision of services by cost-sharing associations to its members, published 9 June 2016.