According to Art. 6 (1) 8 (i) of the Austrian VAT law 1994, the revenue from the “management of special investment funds”, the “management of holdings in the context of the business of providing capital … by undertakings holding a concession for this purpose”, as well as from the “management of special investment funds as defined by the other Member States” is exempt from VAT. This legal regulation corresponds to Art. 135 (1) (g) of the European VAT Directive with the aim of fiscal neutrality which does not allow economic operators who carry out similar transactions to be treated differently for tax purposes. According to the principle of fiscal neutrality, it has to be ensured that economic operators are able to choose the form of investment which best suits them – not facing the risk that their operations could be excluded from the tax exemption. Therefore, this regulation intends to protect small investors who would otherwise have a disadvantage compared to large investors who invest directly without being burdened with administration fees.
In the joined cases C-58/20 and C-59/20 the European Court of Justice (CJEU) dealt with the question whether fund management services are covered by the tax exemption according to Art. 135 (1) of the European VAT Directive if the services are (partly) outsourced to a third party.
In the consistent case law, the CJEU has already dealt with the criteria for tax exemption as well as the tax treatment of such services which are outsourced to a third party. For example, in its decision of 2 July 2020, Blackrock Investment Management (UK), C-231/19 the CJEU stated that the services of an external service provider can also be exempt from VAT if they form a distinct whole which is intended to fulfill the specific and essential functions of managing special funds.
In the current case law, the CJEU specified further the respective criteria. According to the CJEU, the following criteria must be met to qualify for the VAT exemption:
Distinct or autonomous character
First of all, it has to be determined whether the services provided by a third party are forming a distinct whole. However, as the CJEU states, it is not required that the services which are specific to and essential for the management of special investment funds must be completely outsourced to the service provider to be covered by the tax exemption which is a fundamental and trend-setting statement in the current legal case. If the application of the tax exemption required the entire outsourcing of the services, management companies which themselves supply those services and economic operators who invest directly, would be favoured from a tax point of view.
Specific and essential character of the service
In a second step, it has to be assessed whether the services provided by a third party are specific to and essential for the management of special investment funds. It is crucial that the services provided are closely linked to the activities of the management company.Regarding services provided by a third party to a management company, it has to be examined “whether the service provided … is intrinsically connected to the activity characteristic of a management company, so that it has the effect of performing the specific and essential functions of management of a special investment fund.” Instead, services which arise regarding any type of investment are not specific and not covered by the term management of a special investment fund.
Conclusion
In its decision regarding the joined cases C-58/20 and C-59/20, the CJEU has given guidance concerning the interpretation of the requested criteria for the VAT exemption. As also the fund management is affected by increasing digitalization, the current legal questions dealt with by the CJEU are of high practical relevance.
Nevertheless, are there any significant differences regarding the interpretation of the criteria followed by differences in the application of the exemption to be expected between the Member States? According to the settled case-law of the CJEU, the exemptions of Art. 135 (1) of the European VAT Directive are independent concepts of the EU law with the purpose to avoid divergences in the application of the VAT system as between one Member State and another. Therefore, in principle, based on this case law of the CJEU, there should not be serious differences in the application of this tax exemption between the EC Member States. Besides, the criteria for the tax exemption according to Art. 135 (1) of the European VAT Directive have to be interpreted strictly as those have to be regarded as exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person. Nevertheless, if exclusivity of the services is given – this means if the service is provided exclusively for the purpose of managing special assets and not for other funds, a more frequent interpretation is possible. In this context, it is crucial for assessment what specifically falls under the management of special funds and what is meant by a special fund.
The CJEU has already dealt with the clarification of the question what is regarded as special fund covered by the tax exemption. According to the CJEU, the term “special funds” includes undertakings for collective investment in transferable securities (UCITS), as well as comparable investment vehicles which are based on the principles of risk diversification and which, due to their characteristics, are comparable to and compete with UCITS (among others, see decision of 4 May 2006, Abbey National, C-169/04, decision of 7 March 2013, Wheels Common Investment Fund Trustees Ltd, C-424/11 as well as decision of 28 June 2007, JP Morgan Fleming Claverhouse, C-363/05). Besides, no restriction can be seen with regard to the type of investment or the assets held by the regulated fund vehicle, as there is a direct competition between fixed assets that are subject to special government supervision, regardless of whether the fund vehicles consist of securities or real estate (decision of 9 December 2015, Fiscale Eenheid, C-595/13).
In its decision of 7 March 2013, GfBK (C-275/11), the CJEU indicated a broad interpretation of the term “management” by stating that also advisory services could be covered by the tax exemption if the criteria are met. According to further jurisdictions of the CJEU, this also applies to administrative and accounting services under the conditions. As the CJEU stated in the current joined cases, management and accounting services, such as services “ensuring that the income received from the fund by unit-holders is taxed in accordance with the nationallaw as well as the grant to use software especially for the purpose of the special fund”, are covered from the tax exemption “if they are intrinsically connected to the management of special investment funds and if they are provided exclusively for the purposes of managing such funds.” Besides, it is not necessary that the management function is outsourced in its entirety.
In more detail, in case C-58/20 tax services ensuring the legally compliant taxation of the income received from the fund by unit-holders (preparation of the necessary calculations on the basis of the fund accounting data) and the execution of the corresponding reports required by the law were outsourced to a service provider.
Additionally, the current case law is particularly important for the provision / use of software as the tax exemption for such services is being considered further. Case C-59/20 dealt with the granting of usage rights to software modules that were used to carry out essential calculations concerning performance measurement and risk management. This software was specifically for the investment fund business. With regard to software the CJEU states that the mere fact that a service is carried out entirely by means of electronic data processing does not exclude the application of the tax exemption for these services. Nevertheless, the criteria for the tax exemption are not met if the software has been designed for the management of various types of investments and is used by the management company for the management of special funds as well as for the management of other funds. If, on the other hand, the software is used exclusively for the management of special funds (and not for the management of other funds), it can be regarded as specifically for this purpose according to the CJEU.
Yet, it is up to the national courts to decide whether the requested criteria are met and subsequently, if the tax exemption is applicable in the individual cases. Therefore, even though the national courts have generally tended towards tax exemption concerning the actual cases, it remains to be seen how the national courts will apply the criteria, especially if exclusivity of the services is given.
Nevertheless, what happens if a third party provides different services, that means on the one hand services exclusively for the management of special funds and on the other hand services available for any funds? In this case, the required exclusivity is to be questioned.
In conclusion, it should be noted that this judgment, which provides further clarification and guidance, will have a significant practical impact, but it remains to be seen how the national courts will apply the criteria.
If you wish to discuss this topic, please contact: ICON Wirtschaftstreuhand GmbH, Linz
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