Luxembourg: Wheels CJEU Ruling Of March 7, 2013

Pursuant to article 135 (1) (g) of Directive 2006/112/EC (the "VAT Directive") Member States must exempt from VAT "the management of special investment funds as defined by Member States". A group pension fund that provides defined benefits to the group employees lacks the salient features of "special investment funds" as understood by the Court of Justice of the European Union ("CJEU"). As a consequence, management services provided to such pension funds are subject to VAT at ordinary rates.

The facts and question at issue

Wheels Common Investment Fund (the "Fund") is a fund pooling the assets of a number of Ford group pension schemes. The Fund receives its financing by way of contributions by the employer and the employees, a trustee managing the Fund in the context of a retiring pension scheme. Under that scheme, the employees are entitled to pension payments based on the length of the service with the employer and of the amount of salary, as is typical in defined benefits pension schemes. The question the CJEU had to address was whether the Fund is a "special investment fund" as per the VAT Directive, in which case the trustee's services to the Fund would be exempt.

Member States' discretion is constrained as regards the definition of "special investment funds"

Under constant case-law, exemptions provided for under the VAT Directive typically have to receive a common interpretation binding on all Member States. That general principle however does not apply in those cases where the VAT Directive itself refers to the individual Members States for the purpose of defining the relevant concept. That is precisely the case for "special investment funds", since the VAT Directive grants the power to define that concept to the individual Member States ("as defined by Member States").

However, even under those circumstances the Member States are not totally free to decide as it pleases them. According to the CJEU, when exercising their powers, the Member States need to comply with both the purpose of the provision as well as the tax neutrality principle:

• the purpose of the provision regarding the management of specialized investment funds is to facilitate the investment in securities by the public;
• the tax neutrality principle requires goods and services that are in competition with each other to be taxed identically.

Defined benefit pension funds are not special investment funds

According the CJEU, there exist structural differences between the Fund and special investment funds. For one, the Fund is not open to the public, but is limited to group employees. Second, the employees' pension will not be based on the value of the assets held by the Fund and the returns generated by their contributions, but will be defined in advance on employment law based criteria (length of service, level of remuneration). The Fund may not be seen as a special investment fund for the employer either, since the employer makes the payments into the Fund solely in order to meet its legal obligations towards its employees. For these cumulative reasons, the CJEU ruled for the Fund not to be a special investment fund as per the VAT Directive.

Impact of the Wheels case

On the basis of the Wheels case it appears that the Luxembourg legislation is too broad and hence needs to get amended. Indeed, under the present legislation the management of any "pension fund supervised by the CSSF" is exempt from VAT. The question is whether that exemption needs to get repealed altogether or simply reduced in its scope. It seems to us that a reduction of the scope is all that will be required here.

When considering the Wheels ruling, it appears that the CJEU put great emphasis on the difference in the economics of investments made in regular investment funds and the entitlement under defined benefits pension funds, in order to reach its conclusion for the two being too dissimilar such that the tax neutrality principle does not apply. Indeed, defined benefits pension schemes are advantageous for members in that the scheme (and by extension, the employer) takes all the investment risk and is obliged to meet the "pension promise" made to each member, regardless of how its underlying investments have performed. That structural difference with regular investment funds justifies pension funds paying out defined benefits not to be assimilated to specialized investment funds.

For the same reason, pension funds based on defined contributions should still be seen as qualifying as specialized investment funds. A defined contribution plan is a type of retirement plan in which the amount of the employer's annual contribution is specified. Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts (through employer contributions and, if applicable, employee contributions) plus any investment earnings on the money in the account. Only employer contributions to the account are guaranteed, not the future benefits. In defined contribution plans, future benefits fluctuate on the basis of investment earnings. In our view, pension funds based on defined contributions are sufficiently akin to regular investment funds for their management services to be exempt from VAT : indeed, rather than investing in the pension fund on behalf of its employees, the employer could make an additional cash payment to its employees in order for the latter to invest in regular investment funds. In the end of the day, the employee will always receive a payment based on the return generated by the investments made by the pension fund, as is the case for any regular investment fund.

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