Also featured in Global Tax Weekly, 31 December 2015
On Thursday 9 December, the CJEU released its ruling in the Dutch case of “Fiscale Eenheid X” (freely translated to “VAT group X”), case no. C-595/13. This case regards the application of the VAT exemption for fund management services and impacts the entire fund management sector. Even though the case of Fiscale Eenheid X primarily concerns the management of real estate investment funds. Taxand Netherlands discusses.
Case Fiscale Eenheid X
The case regards 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. The second question is which of the services provided by the external asset manager qualify as fund management and can thus be charged to the real estate funds exempt from VAT.
Qualification as special investment fund
To qualify as special investment fund, the investors have participation rights in the fund whereby their return on the investment depends on the performance of the investments made by the fund’s managers over the period for which those persons hold those rights. The assets of the investors need to be pooled, whereas the risk borne by those beneficiaries must be spread over a range of assets.
The fact that the assets are in immovable property rather than in securities is of no consequence for determining that management services qualify as VAT exempt management of investment funds. To qualify as exempt special investment funds, companies must generally display characteristics identical to undertakings for collective investment as defined by the UCITS Directive. This EU Directive established common and basic rules for the authorisation, structure, the operation and activities of collective investment undertakings situated in the Member States and the information they must publish.
Therefore, if a company is sufficiently comparable to such collective scheme it should be considered in competition which such scheme. The fund management of such schemes should then both be VAT exempt, principally to avoid distortion of competition between two comparable products (referred to as the principle of neutrality).
Specific State Supervision
The case of Fiscale Eenheid X makes clear that the CJEU puts more focus on the element of State supervision than ever before. Following the Opinion of the Advocate General in this regard the exemption seems to apply only to investment undertakings that are subject to specific State supervision at national level, if not already subject to the supervisory rules dictated by EU law following the UCITS Directive.
Although an element of State supervision is required going forward for, let’s say, non-UCITS funds, the CJEU does not provide sufficient guidance to the required minimum level of State supervision. It only mentions that it should be ‘comparable’. How should we exactly interpret this? We anticipate this will lead to even more uncertainty in the market on application of the VAT exemption. From a Dutch VAT perspective, it could however be argued that when the scope of the State supervision within a Member State sees to protect the financial interest of investors, application of the exemption is still possible. After all, ‘being subject to licensing and oversight rules’ that is imposed by local Financial Services Authorities should in our view not mean that a VAT exemption can only granted be for the management of ‘licensed’ funds. We nevertheless expect that this element will again lead to new CJEU case law as market operators simply require more clarity on this aspect.
If such a scheme is subject to specific State supervision, than the VAT exemption can be applicable to fund management of investment funds in immovable property. It should in any case be expected that the national tax authorities within the EU Member States may find new arguments in this case to argue differently.
All services rendered VAT exempt?
Concerning the second question, the CJEU has provided guidance on which of the services provided by external asset managers qualify as VAT exempt fund management.
The CJEU rules that the actual management of the properties is not specific to the management of a special investment fund given the fact that these activities go beyond the various activities connected with the collective investment of capital raised. Thus where the assets of such a fund consist of immovable property, its specific activity for example include activities relating to the selection, purchase and sale of immovable property as wells as administration and accounting tasks.
As such the objective of the actual management of properties such as rent collection, arranging ordinary maintenance work and supervision thereof is not specific to the activity of special investment fund where it is intended to preserve and build up the assets invested. It is then inherent to any type of investment. The actual management of the immovable property is therefore considered subject to VAT.
The application of VAT exemptions that apply to financial services is still heavily debated within the various Member States of the European Union. Not just within the banking and insurance environment, but certainly also for the fund management industry.