OUR INSIGHTS AT A GLANCE

  • On 17 June 2021, the Court of Justice of the European Union released a decision in the frame of two joined cases relating to the scope of application of the VAT exemption for the management of special investment funds.
  • In its judgment, the Court ruled that some tax and IT services outsourced to third-party service providers can fall within the scope of the VAT exemption provided certain conditions are met.
  • Although this decision recalls the well-established jurisprudence of the Court, it provides useful clarifications on the application of the VAT exemption to outsourced services, as well as on the specificity criteria to be met to benefit from the exemption.

On 17 June 2021, the Court of Justice of the European Union ("CJEU", the "Court") released a decision in the frame of two joined cases (K and DBKAG – C-58/20 and C-59/20) relating to the scope of application of the VAT exemption for the management of special investment funds ("SIFs"). In its judgment, the Court ruled that some tax and IT services outsourced to third-party service providers can fall within the scope of the VAT exemption provided certain conditions are met. Although this decision recalls the well-established jurisprudence of the Court, it provides useful clarifications on the application of the VAT exemption to outsourced services, as well as on the specificity criteria to be met to benefit from the exemption.

Factual background

In the first case, Austrian fund management companies called upon the services of a provider ("K") to handle notably the calculation of specific tax statements applicable to funds' investors in Austria. K issued invoices for these services by applying the fund management VAT exemption but the Austrian Tax Authorities did not concur with that approach and were of the opinion that VAT was applicable.

In the second case, the Austrian fund management company DBKAG was granted the right by a German IP company to use a software programme essential for risk management functions and performance measurements. This software had to be used together with another software programme of the management company to be functional. The IP Company issued its invoices without German VAT according to VAT territoriality rules. The Austrian management company considered these services as covered by the fund management VAT exemption but the local Tax Authorities challenged that position too.

Questions raised to the CJEU

Does the fund management VAT exemption apply to the following outsourced services when rendered to fund management companies?

  • tax services consisting of ensuring that the income received by investors of SIFs is subject to correct tax treatment;
  • software specifically designed and exclusively used for the management of SIFs.

Decision of the CJEU and potential impacts

The CJEU started by recalling its settled case-law. To benefit from the SIFs management VAT exemption, the services provided by a third-party manager must, viewed broadly, form a distinct whole fulfilling in effect the specific, essential functions of the management of special investment funds.

Firstly, the Court clarified that services do not need to be entirely outsourced to benefit from the VAT exemption. As a consequence, a partial outsourcing of SIFs management services must not have the effect to challenge the application of the related VAT exemption.

Secondly, and on the specific and essential character of the services for the management of the SIFs, the Court confirmed that administrative tasks notably listed in Annex II of the UCITS Directive (legal, fund management accounting services, valuation and pricing) can benefit from the VAT exemption if they are specific and essential for the SIFs management. Nevertheless, the Court recalled its recent jurisprudence Blackrock Investment Management (C-231/19) where it was clearly stated that the VAT exemption was not applicable to services which were designed for the management of various types of investments and could be used without distinction for the management of SIFs and for that of other funds. The use of similar services by SIFs and non-SIFs may lead to the consideration that the services do not meet the specificity criterion.

In the case at hand, the Court ruled that not entirely outsourced tax and IT services can benefit from the SIFs VAT exemption provided these services (1) are intrinsically connected to the SIFs management and (2) are provided exclusively for the purpose of managing such funds. It is now up to the referring Austrian Court to assess whether the services provided by K and DBKAG meet these conditions to benefit from the VAT exemption.

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