Dutch High Court decision on the impact of receiving VAT exempt interest income on the VAT recovery position of a notary

The Amsterdam High Court has held that the interest received by a notary, pertaining to funds held in a trust account, qualifies as VAT exempt turnover and is relevant for the VAT recovery ratio calculation of the notary. As a result, the notary is required to apply a pro-rata calculation for the deduction of Value Added Tax (VAT).

In the case at hand, X BV provides notarial services to customers which are subject to VAT. In the course of its operations, X BV also maintains a trust account which is used for temporary custody of third-party funds that are used for real estate or share transactions executed by the notary on behalf of its clients. The interest accruing on the balance of the trust account benefits X BV, no interest is remunerated to the beneficiaries due to the short period that the funds are in the trust account. In its VAT return, X BV claims a full input VAT deduction on its general expenses. The tax inspector however argued that the interest received on the trust account constitutes VAT exempt turnover and should be included in a pro-rata calculation of X BV. 

The Amsterdam High Court ruled that the interest received by X BV for funds in its trust account qualifies as VAT exempt turnover. According to the High Court, the interest received by X BV relates to economic activities that fall under the scope of Dutch VAT. The interest revenue is also closely connected with the operational activities of a notary, as it regularly provides credit to the bank (i.e. due to the availability of third-party funds on its trust account). As a result, the granting of credit by X BV cannot be considered to be incidental and should be taken into consideration when determining its deduction right on general costs.

Key takeaway

This judgement is another example of the VAT recovery right of businesses being more often scrutinized or disputed by the Dutch tax authorities. In order to mitigate further VAT liabilities, we recommend businesses with significant interest income to assess the potential risks of a restricted VAT recovery right. Our readers will also be familiar with this principle being taken where a holding or parent company makes interest bearing loans to its subsidiaries, and the interest in meaningful.

Reference: ECLI:NL:GHAMS:2023:2324