The Court of Justice of the European Union (ECJ) ruled in the joined cases K (C-58/20) and DBKAG (C-59/20) that the management of tax related responsibilities and the supply of a license to use specialized software can fall within the scope of the VAT exemption applicable to collective fund management. The Court reminds that while exemptions must be strictly interpreted, services provided by a third party may be exempt 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.
In the K case, various management companies outsourced to K, a third party, certain services for the calculation of the taxable income of unit-holders from the funds. The management companies remained the tax representatives responsible for communicating the relevant calculations to the tax authorities but also remained liable for the accuracy of the amounts and potential consequences. K invoiced those services without VAT under the benefit from the exemption relating to the management of special investment funds.
In the other case, DBKAG had acquired the license for the use of software to perform the calculations of risk and performance indicators. Additional training and support was provided by the supplier since the software, which had to be used together with other IT tools owned by DBKAG. As the software was deemed essential to risk management and performance measurement, DBKAG did not self-assess VAT and applied the VAT exemption for the management of special investment funds, this to the disagreement of the Austrian Tax Authorities who considered those as mere VAT taxable technical supplies.
Contrary to the Austrian tax authorities, the ECJ held that such services could benefit from the exemption under the condition that viewed broadly, they formed a distinct whole and are specific to, and essential for, the management of special investment funds:
- Regarding the “distinct or autonomous character” of the services: the fact that a service is not entirely outsourced does not automatically preclude it from the scope of the exemption;
- Regarding the “specific and essential nature” of the services: the Court repeats that the concept of ‘management’ of a special investment fund covers not only investment management but also administrative and accounting service but under the condition that they must be intrinsically linked to the management company's own activity and have the effect of fulfilling the specific and essential functions of the management of an investment fund.
If those requirements are met, the services provided by third parties to management companies, such as those at stake in these cases, can benefit from the VAT exemption. The EU court refers the final assessment of these conditions to the national court.
It must not be forgotten that services which are indistinctly for the use of special investment funds, but also for other types of investments do not fulfill the specific condition and therefore cannot be exempt.
Though the findings of the Court are in line with the long running case law on the subject, it is an interesting development in the field of the services which can be considered as falling within the scope of the notion of management services and potentially benefit from the exemption. It must however be remembered that like any exemption, it must be strictly interpreted and a case by case analysis of the agreements is however be advised in order to ensure that all the conditions set by the Court are fulfilled.
We do encourage special investment funds to analyse whether the services their management outsources, could benefit from the aforementioned VAT exemption. Since special investment funds do in principle not have a right to deduct input VAT, any VAT incurred on its purchases is a cost for them. At Tiberghien we have a broad experience in this respect so do contact us if any assistance is needed.
Ngoc-My Nguyen - Senior Associate (firstname.lastname@example.org)
Gert Vranckx - Senior Associate (email@example.com)
Tiberghien’s international tax team will continue to monitor these and other tax developments relevant for Belgium / Luxembourg based multinational enterprises. Our editorial board consists of:
- Koen Morbée (International and EU corporate tax, firstname.lastname@example.org);
- Michiel Boeren (International and EU corporate tax, email@example.com);
- Katrien Bollen (HR tax and global mobility, firstname.lastname@example.org);
- Ben Plessers (Transfer Pricing and Valuations, email@example.com);
- Gert Vranckx (VAT, customs, excises and other indirect taxes, firstname.lastname@example.org);
- Rik Smet (International and EU corporate tax, email@example.com).
In case you have further questions on this publication or want to discuss a tax query, please do not hesitate to contact the author(s) or one of the members of the editorial board.
This newsflash is for information purposes only and cannot be relied upon as legal advice.