EU court clarifies VAT exemption for fund management services
The Court of Justice of the European Union (CJEU) narrowed on Thursday the interpretation of EU law provisions regarding value added tax exemption for services provided by third parties to management companies of special investment funds.
The court’s ruling specified that the services provided fall within the scope of the VAT exemption for in that provision “if they are intrinsically connected to the management of such funds and if they are provided exclusively for the purpose of managing such funds, even if those services are not outsourced in their entirety.”
This guidance results from a double Austrian case that was referred for a preliminary ruling to the CJEU by Austria’s federal finance court in February 2020. In both cases, companies argued VAT exemption on the basis of EU law provisions over the management of special investment funds.
The notion of 'distinct whole'
The first case opposed the Austrian tax administration to a third-party supplier that provided tax-related services aiming at ensuring the income received by unit-holders from investment funds would be taxed in accordance with national law. The supplier invoiced its services without VAT as it thought these were covered by the VAT exemption applying to the management of special investment funds [Article 135 (1) (g) of the VAT Directive, Ed.].
As for the second case, an investment management company acquired a license from a third-party supplier to use a software designed for risk management and performance evaluation of investment funds. In addition, the third-party supplier provided support services including implementation of the system and training of employees. Likewise the supplier in the first case, the manager believed VAT was not applicable to these tasks.
According to law firm Arendt, the CJEU “reiterated its case law establishing that in order to benefit from the VAT exemption, management services provided by a third-party manager must form a distinct whole and be specific to, and essential for, the management of special investment funds.”
Confirmation of the decision made in BlackRock case
Arendt identified two clarifications from the CJEU on VAT exemption for services provided to the management of special investment funds. The former on the “distinct or autonomous character” of the services. Partial outsourcing of management functions does not generally preclude the application of the VAT exemption, it explained.
The latter clarification concerns the “specific and essential nature” of the service. “In order to fall within the scope of the VAT exemption, the third-party service must be intrinsically linked to the management company's own activity, so that it has the effect of fulfilling the specific and essential functions of the management of an investment fund,” it interpreted.
Arendt said that the CJEU’s ruling echoes its last year decision on BlackRock case as it clarifies “that the mere fact that a service is automated or carried out entirely by electronic means does not in itself prevent the exemption from being applied to that service.” In July 2020, CJEU had ruled services provided by BlackRock’s risk management platform Aladdin to BlackRock’s British investment arm should not be covered by the VAT exemption provided it was not used for the sole management of special investment funds.
Service agreements to be reviewed by investment managers
Trudy Perié, counsel and tax adviser at law firm Loyens & Loeff, sees the CJEU’s ruling as “a positive development.” “The ECJ confirms its views on the application of the VAT exemption and also seems to open the door for application of the VAT exemption in respect of outsourced services such as tax compliance and automation of certain tasks, provided that the criteria set by the court are met,” she said.
Nonetheless, she highlighted that the ECJ “does not explicitly state whether the services in the cases at hand meet these criteria,” leaving these questions to the referring national courts instead. “We expect that whether such types of services can benefit from the VAT exemption will have to be assessed on a case-by-case basis,” Perié said.
Arendt termed the ruling “a welcome decision” that, based on CJEU’s criteria, illustrate any outsourced services provided by third parties to fund management companies can potentially be exempt from VAT, even if they are not fully outsourced. Arendt advised that fund management companies should carry out a review of their existing service agreements to check whether they are in line with this new case law.