Pursuant to article 135(1)(g) of the VAT Directive “the management of special investment funds as defined by Member States” is exempt from VAT.
On 17 June 2021, the European Court of Justice (“ECJ”) issued a ruling on joined Cases C-58/20 and C-59/20 (the “DBKAG & K decision”), stating that both the right to use software and specific administrative services may fall within the exemption provided for in that provision. For that purpose, according to the ECJ, the services must be “specific to and essential for the management of special investment funds” and “intrinsically connected to the activity characteristic of a management company”.
Following previous decisions (e.g. C-275/11 GfBk, C-595/13 Fiscale Eenheid X and C-231/19 Blackrock), the ECJ clarifies the scope of the exemption and outlines that the concept of “management” encompasses more than just management functions per se. According to the ECJ, it also includes certain “administrative functions”, such as accounting, income computations and tax compliance, provided that they are “specific to and essential for” and “intrinsically connected” to the management of Collective Investment Vehicles (CIV).
It is also interesting that both cases concern independent services that may be outsourced (managing tax-related responsibilities of CIVs and granting of the right to use software to carry out calculations for risk and performance management), which creates leeway for the discussion on whether a wider range of services provided by external advisors (such as lawyers, auditors or accountants) may also benefit from the exemption.
Although it is for the national courts/tax authorities to assess whether the criteria for the services to be within the scope of the exemption are met, this decision is likely to have far-reaching impact given that the criteria are exclusively objective (what kind of services are being provided), regardless of who is the entity providing the services.
Following ECJ case law, Portuguese Tax Authorities (“PTA”) have recently ruled on whether the services provided by brokers to a management entity may fall within the exemption, whereby the brokers provide relevant data on potential investors to enable the marketing of new subscriptions for shares in CIVs it manages.
Although the ECJ confirmed that “the fact that certain services are not listed in Annex II to the UCITS Directive does not preclude their inclusion in the category of specific services falling within activities for ‘management’ of a special investment fund within the meaning of article 135(1)(g) of the VAT Directive”, for the PTA, there are formal requirements (related to the Portuguese Asset Management Regime) that must be met for the exemption to apply. In particular, the acquirer must qualify as a “management entity of CIV” and the services must correspond to tasks that are legally assigned to management entities.
According to the PTA, pursuant to ECJ case law, services as ongoing management of investment fund assets, accounting (including invoicing and treasury), legal or consulting services may be considered within the scope of the VAT exemption given that those are specific administrative services essential for the management of funds.
Given that PTA’s position seems to go beyond that of the ECJ, it will be interesting to monitor how national courts/tax authorities will interpret the concept of “intrinsically connected” services, regarding services that are outsourced by, but not exclusive of, a management company.
If you wish to discuss these topics, please contact: Vieira de Almeida (VdA)
