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Exempt, or not exempt within asset management
The current rules on the VAT exemptions that apply to financial services are considered outdated by many industry operators within the various Member States of the European Union. The wording of the VAT exemptions and the interpretative scope of certain definitions used in the EU VAT Directive remain a topic of discussion as application of VAT remains unclear. Not just within the banking and insurance environment, but certainly also for the fund management industry. Taxand's global indirect tax service line discusses.
The VAT treatment of asset management services has already provided for interesting case law from the European Court of Justice (CJEU). Cases of recent years are Deutsche Bank and GfbK and, within the pension fund management sector, the cases Wheels, PPG and of course ATP PensionService A/S are still heating the discussion. And even though the dust has not even settled as many questions remain unanswered, there is already new case law pending before the CJEU that may shake up the market yet again.
The Dutch Supreme Court has referred questions to the CJEU in the case of Fiscale Eenheid X, case no. C-595/13. This case concerns an external asset manager that renders management services to three real estate investment funds. The principal question in this case is whether the management of such real estate investment funds can for VAT purposes qualify as VAT exempt management of a fund for collective investment. As such, the CJEU needs to decide whether the real estate investment funds qualify as special investment fund in the sense of the EU VAT directive. And if so, the CJEU needs to rule which services provided by the external asset manager qualify as fund management and can thus be charged to the real estate funds subject to the VAT exemption. The Dutch Regional Court of Appeal decided that the VAT exemption applied to the fund management, the property management as well as the administrative tasks since these were all considered essential and charateristic functions of exempt fund management.
The case has certain intriguing aspects. For example, can a fund qualify as a special investment fund when it solely invests in real estate properties? Does it need to diversify in the real estate sectors it invests in? Or, does a fund need to invest in financial instruments instead in order to qualify as a special investment fund? One could argue that the nature of the investment is irrelevant and refer to what the CJEU already considered as the essential criteria of special investment funds. To qualify as such the assets of several beneficiaries need to be pooled, whereas the risk borne by those beneficiaries is spread over a range of assets. These criteria are principally met in our view. We are nevertheless curious whether the CJEU shares this view.
In the Netherlands, the asset management of real estate funds are generally covered by the fund management exemption, where this regard the functions of fund management and asset management. Property management services that consists of the actual property exploitation is generally considered taxable as it is not regarded a characteristic and essential element of a fund management service. Given however that the asset manager in case Fiscale Eenheid X also renders property management services as part of its management function, it is interested to learn how the CJEU considers these services. If it considers also property management services are exempt from VAT, this widens the EU definition of fund management. Hence, this will no doubt trigger further interesting arguments for claiming the VAT exemption on other services related to fund management that are currently viewed as taxable throughout the fund management industry.
Different EU Member States form different opinions on fund management. Where the Netherlands has quite broadly exempted real estate fund management in the past, this is different in for example France. From a pure French VAT perspective, the VAT provisions concerning VAT exemption refer to the French Monetary and Financial Code. None of these references deal with real estate investment funds. As a consequence, the management of such funds can currently not at all be characterized as VAT exempt in France. From a practical standpoint, this means that managers of real estate investment funds charge French VAT on their management fees. Whether the real estate funds are able to recover this VAT needs to be determined on a case-by-case basis.
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Both asset managers and funds within and outside the real estate sector throughout the EU should be aware of the potential opportunity or downside that this case could create for them. Taxand advises reviewing whether action should be taken to secure rights in the anticipation of the CJEU’s ruling. Given that the Advocate-General to the CJEU is expected to publish its opinion in May, the court ruling is also expected later this year.