Place of supply rules
Under the EU rules on the place of supply, a service supplied is taxed in the country where the recipient of the service is established or has a permanent establishment. If a permanent establishment is assumed and a Dutch service provider provides services to the permanent establishment, then Dutch VAT will be invoiced. If, on the other hand, no permanent establishment is acknowledged by the Dutch Tax Office, the service will be taxed in the country where the entrepreneur is established. In this latter case, an EU reverse-charge mechanism often applies. A difficult situation arises if the parties assume that there is a permanent establishment, but the Tax and Customs Administration finds – often afterwards! – that there is no permanent establishment. Dutch VAT has then been invoiced “wrongly”, and the tax authorities will refuse to refund the VAT to the service recipient.
Conversely, the service provider may run into problems when they think they are dealing with a foreign entrepreneur but there actually is a permanent establishment. The service provider then incorrectly invoices with “VAT shifted” when they should have invoiced with Dutch VAT.
VAT reverse-charge regulation
The place of business is also important for the question of whether the specific reverse-charge mechanism can be applied in the Netherlands to supplies of goods and services. A foreign entrepreneur must apply the reverse-charge mechanism if he makes deliveries of goods or provides services to an entrepreneur established in the Netherlands.
Therefore, it is important for a foreign entrepreneur who provides services to confirm these services are provided to an entrepreneur established in the Netherlands, as in that case the VAT reverse-charge mechanism must be applied. Here, too, the deduction of input tax can be refused if VAT has been invoiced wrongly after all.
The Dutch company
In practice, the tax authorities often impose additional requirements on companies owned by non-Dutch shareholders. As a rule, the Dutch company must have employees and it must have its own office space. An address care of a supplier or business partner is not sufficient! Unfortunately, we have direct experience of situations where disagreements have arisen about whether the VAT reverse-charge mechanism should have be applied.
Another challenge is that a company can have a Dutch VAT number while there is no information about whether a company is established in the Netherlands.
In all cases, these problems could have been avoided if there was clarity in advance about whether or not there was a permanent establishment or place of business of a Dutch legal entity.
Jos Philips is a VAT specialist at the accountancy firm Schipper Accountants B.V. Jos has studied both Dutch law and tax law and is your contact person in the Netherlands for all questions in the field of VAT and real estate transfer tax.
This article has been publiced in GGI FYI Indirect Taxes News