OUR INSIGHTS AT A GLANCE

  • BlackRock Investment Management (UK) Ltd engaged a US company to provide them with investment management services in relation to funds that are eligible to receive VAT exempt management services and funds that are not eligible for such exemption
  • In the framework of a litigation with the UK authorities in order to determine whether a single supply of management services received from the US company should benefit, even partly, from the VAT exemption applicable to fund management services, the UK courts raised a prejudicial question to the CJEU
  • In his opinion dated 11 March 2020, the Advocate General considered that a single supply of services rendered for the ultimate benefit of funds eligible and not eligible to receive VAT exempt management services should not benefit, even partially, from this VAT exemption
  • The judgement to be released by the CJEU in this case will need to be closely monitored as it may have a significant impact on the VAT position of Luxembourg fund managers

Background

BlackRock Investment Management (UK) Ltd ("BlackRock") is a UK company managing both special investment funds ("SIFs" - funds eligible to receive VAT exempt management services) and other funds (non-SIFs - funds non-eligible for VAT exemption and; therefore, receiving VAT taxable management services). In the case at hand, only a minority of the investment funds managed by BlackRock qualified as SIFs.

In the frame of its management activity, BlackRock engaged the US company BlackRock Financial Management Inc. ("BFMI") to provide investment management services in relation to the two categories of funds managed. These services were rendered from the US through the IT platform "Aladdin" to BlackRock in relation to the management of both SIFs and non-SIFs.

Given that part of the services received from BFMI were used in the framework of the management of SIFs, BlackRock considered that part of the services received from the US should benefit from the VAT exemption applicable to fund management services (based on article 135(1) (g) of VAT Directive). According to BlackRock, the dual use of the single service received from BFMI must not jeopardise the application of VAT exemption to the portion of Aladdin costs linked to the management of SIFs.

UK courts denied the application of the VAT exemption on the services received from BFMI in relation to the management of the SIFs and the Upper Tribunal (Tax and Chancery Chamber) decided to stay the proceedings and to refer a question to the Court of Justice of the European Union ("CJEU").

Question referred to the CJEU

'On the proper interpretation of Article 135(1)(g) of [Directive 2006/112], where a single supply of management services within the meaning of that Article is made by a third-party provider to a fund manager and is used by that fund manager both in the management of [SIFs] and in the management of other funds...:

  1. Is that single supply to be subject to a single rate of tax? If so, how is that single rate to be determined? Or
  2. Is the consideration for that single supply to be apportioned in accordance with the use of the management services (for example, by reference to the amounts of the funds under management in the SIFs and [other funds] respectively) so as to treat part of the single supply as exempt and part as taxable?'

Advocate General's opinion

On 11 March 2020, the Advocate General ("AG") Pikamäe released his opinion on the answer to be provided by the CJEU. The AG started the analysis by recalling the jurisprudence of the CJEU in relation to the concept of single supply and considered that the various services received from BFMI (e.g. market analysis, monitoring performance, risk assessment, monitoring regulatory compliance and implementing transactions) should be treated as a single supply made of various elements.

Turning to the question referred to the CJEU, the AG then examined whether the taxable basis of the single supply could be split in order to receive different VAT treatments on the grounds that a portion of that supply is used for the management of SIFs which could benefit from the fund management VAT exemption if it was considered separately.

In this respect, the AG considered that a single supply such as the service rendered by BFMI for the ultimate benefit of both SIFs and other funds should not benefit, even partially, from this VAT exemption on the grounds that:

  • the application of that VAT exemption would not be in line with the objective of that exemption which is to ensure that the common system of VAT is neutral as regards to the choice between direct investment in securities and investment through SIFs by excluding the cost of VAT
  • there is no objective, transparent and foreseeable criterion to make a split of the single supply in order to determine the proportion in which BlackRock uses the Aladdin services for the management of SIFs;
  • the apportionment pro rata based on the value of assets under management suggested by BlackRock would not be consistent with the objective of the VAT exemption as the VAT applicable to the single supply would vary continuously depending on the value of the SIFs and the other funds and as it may then result in extending the application of the VAT exemption to the other funds.

However, the AG also mentioned that in case detailed data which enables the tax authority to identify precisely and objectively the services provided specifically for SIFs could be provided by the supplier of the fund management services or the recipient of those services in the case of a reverse charge, then these services could still benefit from the VAT exemption.

The judgement to be released by the CJEU in this case will need to be closely monitored as it may have a significant impact on the VAT position of Luxembourg fund managers. In any case, considering a single service as partly VAT taxable and partly VAT exempt could create a risk to have the VAT exempt part of the services jeopardised.

Originally published April 2020

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