Background

Art.135(1)(g) of Directive 2006/112/EC contains a mandatory VAT exemption in respect of the management of special investment funds as defined by Member States. The corresponding provision in the Maltese VAT Act [5th Schedule – Part 2 – 'Exempt without credit supplies'] exempts the supply of services consisting of the management of any investment scheme provided that these services are limited to those activities that are specific to and essential for the core activity of the scheme. For the purposes of applying the exemption from Maltese VAT, investment scheme is defined as a collective investment scheme as defined under the Maltese Investment Services Act and a retirement scheme as defined under the Maltese Special Funds (Regulation) Act.

The fact that the exemption contained in the Directive was subject to different interpretations by MS [due to MS' discretion in defining what constitutes 'special investment funds'] resulted in different VAT treatments across the EU with consequential payment of undue VAT or undue input VAT recovery. Particularly in cross border fund management transactions. Over the years the CJEU was requested to provide guidance as to what constitutes  'management'  and as to which types of funds fall within the scope of the exemption.

Most importantly, the CJEU delivered rulings in the following cases –

  • Banque Bruxelles Lambert (BBL) C-08/03 (2004) where it held that a fund is a 'taxable person' for VAT purposes. From a fund manager's perspective, this is relevant in the context of non-exempt services supplied to funds established in other MS (B2B supplies); and in
  • Abbey National plc (C169/04) (2006), where the Court held that management is not limited to investment/portfolio management but includes certain outsourced administrative services as long as such services form a distinct whole and are specific to and essential for the management of those funds
  • JP Morgan Fleming Claverhouse Investment Trust plc (C-363/05) (2007) where the CJEU held that management services supplied to UK investment trust companies (close-ended) are exempt. The Court's ruling in JP Morgan Fleming sought to ensure equal treatment of different types of funds

Broadly, the CJEU's rulings have sought to apply the same VAT treatment to different types of funds and moreover, extended the scope of the exemption to certain services outsourced by fund managers.

Another ruling  - GfBK (Gesellschaft für Börsenkommunikation mbH, C275-11)

On the 7th March 2013, the CJEU delivered another important ruling in the context of the VAT treatment of fund management services. It held that advisory services concerning investment in transferable securities, provided by a third party to an investment fund manager, falls within the concept of 'management of special investment funds' and therefore is exempt from VAT in terms of Article 135(1)(g) of the Directive. This ruling confirmed the AG's opinion and is line with the Court's 2006 decision delivered in Abbey National plc.

Interestingly, the CJEU held that the outsourced service is exempt notwithstanding that the third party service provider (i.e. the party that was subcontracted by the fund manager) has not acted on the basis of a mandate within the meaning of the EU Directive for Undertakings for Collective Investments in Transferable Securities (UCITS).

Observation

On one hand, this ruling represents a positive signal to the investment fund industry in that it means that the outsourcing of fund management related services will not result in unrecoverable VAT that eventually cascades onto the investors. This is particularly relevant in the context of the way that fund management industry has evolved where outsourcing has become more frequent.

On the other hand, the exemption (without credit) at the level of 3rd party service providers will shift a degree of irrecoverable VAT from the fund managers onto the 3rd party suppliers. This may lead 3rd party service providers to review the fee structures taking into account the VAT blocking resulting from the exemption.

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