Application of reverse-charge mechanism

Although the Netherlands Turnover Tax Act stipulates that liability for payment of the value-added tax charge on a product or service essentially rests with the supplying business, there are scenarios in which the reverse-charge mechanism ensures that liability for payment of the value-added tax component comes to rest with the recipient rather than the supplier of the product or service. This is the case, for example, when an immovable property having been put up as security transfers to a business owner in execution of the security right, thus ensuring that the Tax and Customs Administration should not be diddled out of the outstanding value-added tax while the business owner’s entitlement to value-added tax relief remained unaffected.

According to the Supreme Court of the Netherlands, the reverse-charge mechanism should likewise prevail in the event of the mortgage holder (i.e. the mortgage lender) rather than pressing for foreclosure coming to an arrangement with the mortgagor (i.e. the mortgage borrower) involving the private sale of the collateral, with the proceeds being used to pay off the mortgage debt. If the reverse-charge mechanism did not apply, this would enable the mortgage holder to draw off (part of ) the money owed to it by its debtor from the latter’s value-added tax cache, leaving the Tax and Customs Administration empty-handed even though the property’s new owner would still be able to seek value-added tax relief.

It is invariably up to anyone who intends to apply the reverse-charge mechanism to present the facts and render it plausible when challenged that all conditions governing the scheme have been satisfied.

Dutch version: Toepassing verleggingsregeling