News › Weekly Alert Article
Updated VAT treatment of real estate funds
The Finnish Supreme Administrative Court has discussed certain VAT aspects relating to real estate funds in a recent judgment. Taxand Finland discusses the case of a Finnish private equity fund which led to this decision.
In the structure in question the fund purchased all the management services including administration and development of the real estate, managing the contracts relating to the real estate, reporting, bookkeeping and other administrative duties from its general partner. The general partner did not employ any staff, therefore it purchased certain services further from 2 other companies which were subject to Finnish VAT.
The general partner applied for VAT liability based on the management services offered to the fund. Conventionally, in Finnish tax practice the management services of a general partner offered to a private equity fund have been considered to belong to such financial services which are exempt from VAT. On the other hand, based on Finnish VAT Act, trading of a security which entitles to control a defined apartment, real estate or part of those shall not qualify as VAT-exempt financial service.
The court increased legal certainty concerning the abovementioned question by declaring that the management of a real estate fund investing only in the shares of real estate companies shall not be deemed to be VAT exempt financial service. The court also stated that the demand for neutral treatment in value added taxation did not prevent treating the activities of the general partner subject to VAT.
The resolution considerably decreases the uncertainty regarding the VAT treatment of real estate fund structures. In practice, it seems possible that a general partner of a real estate fund is, at least in certain circumstances, able to become subject to VAT and therefore VAT of the services it purchases from third parties can sometimes be fully deductible. This naturally decreases the possible VAT leakage of the general partner or the fund in general to a considerable extent. Naturally, the applicability of the principle cannot be extracted to such private equity funds which are not subject to VAT, nor it directly decreases the prevailing uncertainty regarding housing funds.