Although the CJEU refers to the local court to decide on the application of the VAT exemption for the services at stake, the case provides meaningful insights on the scope of the fund management VAT exemption.
Firstly, regarding the distinct and autonomous character of the services, the CJEU clarifies that a service, which is specific and essential to the management of a qualifying fund, should not necessarily be outsourced in its entirety to benefit from the VAT exemption. According to the CJEU, such restrictive interpretation would lead to a limitation of the practical effect of the possibility for outsourced services to benefit from that exemption. In practice, this means that a specific fund administration service delegated on a stand-alone basis may benefit from the VAT exemption. In Luxembourg, this position may, to some extent, be considered as an easing of the current conditions for applying the fund management fund exemption in particular in relation to the concept of “isolated” services which were excluded from the scope of the VAT exemption according to the circular letter n°723 bis dated 30 April 2010 from the Luxembourg VAT authorities.
Secondly, regarding the specific and essential character of the service, the CJEU reiterates that apart from the tasks of portfolio management, those of administering qualifying funds, such as those set out in Annex II to the UCITS Directive, come within the scope of the VAT exemption. 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 the VAT exemption. In its judgment, the CJEU is adding concrete examples to the list of services as it suggests that (i) tax-related responsibilities consisting of ensuring that the income received from the fund by unit-holders is taxed in accordance with national law and (ii) the grant of a right to use software used to perform calculations essential to risk management and performance measurement may fall within the exemption. The CJEU reminds that the services must be intrinsically connected to the management of special investment funds and provided exclusively for the purposes of managing such funds.
While it is important to monitor the final decision of the local court in Austria, this judgment certainly brings additional guidance and clarity on the scope of the fund management VAT exemption. For asset managers and qualifying investment funds, it is an invitation to perform a review of outsourced management services, especially in the fields of software and fund administration services, to confirm whether a VAT exemption could apply.
In joined cases K (C‑58/20) and DBKAG (C‑59/20), the CJUE was requested to analyse the VAT treatment applicable to services consisting in i) calculation of the taxable income of unit-holders in investment funds and ii) granting of the right to use a software to perform management and risk computations, both performed by external entities to companies in charge of management of special investment funds.
In both cases the Bundesfinanzgericht (Austrian’s Federal Tax Court) asked the CJUE if the above-mentioned tasks would be covered by the concept of “management of special investment funds” foreseen in Article 135 (1) (g) of the EU VAT Directive. Due to the similarity of the questions referred, both requests for preliminary rulings were joined in one single case by the CJUE.
a. K case
In the K case (C‑58/20), several Austrian management companies externalised – to the service provider K - tasks related to the calculation of the taxable income of unit-holders in investment funds, such as the preparation of tax statements.
In particular, K had to undertake its tax compliance services by using the management companies and custodian banks’ income calculations and reproduce the values indicated in the overall balance and in the calculation of income at the level of the funds.
K invoiced its services to the management companies without VAT, considering that these were covered by the VAT exemption applicable to the “management of special investment funds”.
b. DBKAG case
In the DBKAG case (C‑59/20), an Austrian management company acquired the right of use of a third party’s software intended to perform computations for the management of risk and performance of special investment funds.
The computations undertaken by the software were subsequently used by the management company for the compliance of its mandatory tasks related to the disclosure of risk and performance of the funds managed.
The management company also acquired, from the same provider, support services (e.g., implementation of the system, software corrections and training of employees).
The management company did not account for reverse charge VAT, neither in respect to the right of use of the software nor in respect to the support services, as it considered that said were covered by the VAT exemption applicable to the “management of special investment funds”.
In its decision, the CJUE summarises the reasoning previously presented in other decisions issued in this regard – e.g., cases Abbey National (C‑169/04), GfBk (C‑275/11) and Blackrock Investment Management (C‑231/19) – according to which, in order to be classified as exempt transactions, services provided by a third-party manager must, viewed broadly, form a distinct whole fulfilling in effect the specific and essential functions of the management of special investment funds.
As regards to the requirement that the outsourced functions form a distinct whole fulfilling the functions of the management of special investment funds, the CJUE rejects the interpretation that only services entirely outsourced may be covered by the VAT exemption.
In the particular case of services consisting of the calculation of the taxable income of unit-holders in investment funds outsourced by the management company in the K case and the software to perform management & risk computations acquired by the management company in the DBKAG case, the Court argued that taxpayers must be able to choose the business arrangements which best suit them without seeing the benefit of exemption compromised, concluding that the aforementioned services may benefit from the VAT exemption provided they form a distinct whole fulfilling the functions of the management of special investment funds.
Also in line with previous case-law, the CJEU recapped that the concept of “management of special investment funds” not only covers management functions per se but also administrative tasks strictly related to that management - such as accounting, income computations, mandatory disclosure duties and tax compliance – provided that those are intended to fulfil specific and essential functions of the management of special investment funds.
However, and as previously decided in Blackrock Investment Management (C‑231/19), the CJUE confirms that in situations where a service can be used for the management of special investment funds and also for other types of investments, said service should not be covered by the VAT exemption (as it may not be considered as specific and essential for the management of special investment funds).
Bearing in mind the above, the Court ruled that services such as tax-related responsibilities consisting in ensuring that the income received from the fund by the unit-holders is taxed in accordance with national law and the grant of a right to use software, which is used exclusively to carry out calculations which are essential for risk management and performance measurement, fall within the scope of the exemption if:
they are intrinsically connected to the management of special investment funds and
they are provided exclusively for the purpose of managing such funds, even if those services are not outsourced in their entirety.
As per the CJUE, the fulfilment of these criteria should be analysed by the referring national Court.
Although the reasoning adopted by the CJUE in its decision is in line with previous case-law issued in this regard, we see that the Court opens a door to outsourced services such as the calculation of the taxable income of unit-holders in investment funds (i.e., specific tax compliance obligations) and the granting of the right to use a software to perform performance management & risk computations to benefit from the VAT exemption set forth for the management of special investment funds.
In fact, as the CJUE did not directly decide that the services in the cases at hand were considered specific and essential for the management of the special investment funds – leaving said analysis to the referring national Court, which should issue a final decision in this regard in the next few months- business operating in the fund management industry should carefully assess the VAT treatment applicable to services such as tax compliance and use of risk & management software platforms on a case-by-case basis. The case also represents a good opportunity to undertake a wider review of outsourced services with a view to evaluate whether services currently taxable could benefit from a VAT exemption going forward or even for the past.
There is no specific protective claim procedure in Luxembourg and any correction to the VAT treatment of past transactions would have to be done through the filing of amended VAT returns.
In cooperation with PwC Austria, PwC Luxembourg is actively monitoring the outcome of the national proceedings in Austria, so as to analyse if the final decision which is expected to be issued by Bundesfinanzgericht (Austrian’s Federal Tax Court) confirms the application of the VAT exemption to the services at stake.
There are also on-going discussions on the Luxembourg market between various stakeholders and through professional associations which we are closely monitoring. Further clarification/guidance from the Luxembourg authorities on this case would be very welcome in the coming months.
PwC Luxembourg VAT team is available to help you understand the impacts of this judgment on your business.
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