VAT on a Management Fee (Everything you need to know)

Yes, in most cases, a management fee is taxed with VAT. A management fee is a fee for management services and usually falls below the 21% VAT rate.

The major exception to this main rule is the tax unit for VAT: When the management fee is invoiced within a tax unit for VAT, no VAT has to be charged. This fiscal unit for VAT does not have to be applied for separately, but that is possible.

The management fee and the fiscal unit are the 'leading persons' of this article: enjoy! Questions? here you can find us.

The basis: when is there a management fee?

A management fee is essentially a fee that a holding company, bv or parent company charges to a subsidiary or affiliated company for management services. This should include:

1. Governance and management,
2. Financial management or,
3. Human resources.

The basis is that these services are subject to VAT. However, the VAT obligation depends on how these services are provided and on the legal and organizational structure of the parties involved.

When do you not have to charge VAT (and are you not entitled to deduct)?

There are mainly three categories when no VAT has to be charged:

1. The management fee is calculated within a tax unit for VAT.
2. According to the tax authorities, the activities are not “economic activities”.
3. The services fall under a VAT exemption (such as healthcare or education).

Section 3, the VAT exemption, will only rarely apply as the nature of management services are VAT-taxed services.

When discussing the situations where VAT does not have to be charged, it must be said that many entrepreneurs actually want to charge VAT. After all, without VAT-taxed services, you cannot deduct them either.

Management services as economic activities

A holding company can only deduct VAT if it itself carries out VAT-taxed economic activities. This is the case, for example, when it provides paid services to its subsidiaries, such as legal advice, management or HR support. In practice, this is often arranged through a management agreement, where the holding company receives a fee (management fee).

Not only the management fee is an economic activity, charging interest on loans to subsidiaries is also an economic activity. It is crucial that there is a fee for the service. Without payment, there is no economic activity and therefore no right to deduct VAT.

This fact is also evident from a ruling by the European Court of Justice. If the holding company interferes with the subsidiary without being paid, it may not deduct the VAT on costs incurred.

The key take-away here is that without a management fee, no “economic activity” for VAT purposes is carried out.

The tax entity for VAT

In short, a tax entity is an arrangement where several closely related companies are considered as one VAT entrepreneur. As a result, they do not have to charge VAT on transactions among themselves. This can provide administrative benefits and liquidity benefits. The fiscal unity in VAT is not to be confused with the fiscal unity in corporate income tax!

Requirements for a tax unit for VAT

VAT entrepreneurs in the Netherlands who are financially, organizationally and economically intertwined can be regarded as one VAT entrepreneur. By being classified as a fiscal entity, all entrepreneurs are jointly and severally liable for the turnover tax due by the other entrepreneurs in the tax entity. A fiscal entity is created by operation of law as soon as all conditions have been met. Formal determination can take place at the initiative of the taxpayer or the inspector, for example by requesting a decision from the tax authorities.

Three intertwines

The three interrelationships are discussed above. Essentially, it's about the question: do entrepreneurs work together enough as a group to be classified as a fiscal entity? To this end, three requirements have been set:

1. Financial interconnectedness: One party holds more than 50% of the shares in the other's profit. According to the Supreme Court (in 2003), less than 50% is insufficient.
2. Organizational interconnectedness: The various companies are under a management functioning “as a unit”. ‍
3. Economic interconnectedness: Entrepreneurs focus on the same customer base or provide complementary services. “Essentially” usually means more than 50%, but there are examples in case law that less is also sufficient.

Consequences and points of attention in the case of fiscal unity

When a fiscal entity in VAT can be concluded, the following points should certainly be considered:

1. VAT collection expires internally: Services between parts of a fiscal entity are not taxed. This can simplify internal transactions and prevent non-deductible VAT among group entities.
2. Your own VAT number: The tax entity gets its own VAT number. Components can file their own VAT returns with their own “subnumbers”.
3. E-Recognition required: Since 2022, separate E-Recognition has been required for the fiscal unit.‍
4. Joint and several liability: All components are liable for the tax entity's VAT debts.‍
5. No retroactive effect: A fiscal unity decision does not work retroactively.
6. ‍Fiscal unity is territorially limited: Fiscal units only apply within the Netherlands.

Need help with VAT on management fees?

Are you unsure whether to charge VAT or whether you qualify for a fiscal entity? Our tax specialists are happy to help you!

Documentation used

1.  https://curia.europa.eu/juris/document/document.jsf?text=&docid=187021&doclang=NL 
2.  Article 7 Sales Tax Act 1968
3.  Article 43 Recovery Act 1990
4.  https://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:HR:2003:AF4532 
5.  https://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:HR:1989:ZC3993 

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