On 17 June 2021, the Court of Justice of the European Union (CJEU) issued a very important judgement regarding the VAT exemption available for the management of special investment funds. The judgement was passed in joined cases C-58/20 (K) and C-59/20 (DBKAG), initiated by an application for a preliminary ruling submitted by the Austrian Federal Finance Court (Bundesfinanzgericht). In both cases the Austrian Tax Office (Finanzamt Österreich), formerly Tax Office, Linz (Finanzamt Linz) refused to grant the Austrian operators the benefit of the exemption from VAT provided for in Article 135 (1) of the European VAT Directive.
VAT rules on management of special investment funds
According to Art. 6 (1) 8 (i) of the Austrian VAT law, the revenue from the “management of special investment funds”, the “management of holdings in the context of the business of providing capital … by undertakings holding a concession for this purpose”, as well as from the “management of special investment funds as defined by the other Member States” is exempt from VAT. This legal regulation corresponds to Art. 135 (1) (g) of the European VAT Directive with the aim of fiscal neutrality which does not allow economic operators who carry out similar transactions to be treated differently for tax purposes. According to the principle of fiscal neutrality, it has to be ensured that economic operators are able to choose the form of investment which best suits them – not facing the risk that their operations could be excluded from the tax exemption. Therefore, this regulation intends to protect small investors who would otherwise have a disadvantage compared to large investors who invest directly without being burdened with administration fees.
In the joined cases C-58/20 and C-59/20 the CJEU dealt with the question whether fund management services are covered by the tax exemption according to Art. 135 (1) of the European VAT Directive if the services are (partly) outsourced to a third party.
In the consistent case law, the CJEU has already dealt with the criteria for tax exemption as well as the tax treatment of such services which are outsourced to a third party. For example, in its decision of 2 July 2020, Blackrock Investment Management (UK), C-231/19 the CJEU stated that the services of an external service provider can also be exempt from VAT if they form a distinct whole which is intended to fulfil the specific and essential functions of managing special funds.
Further specification of the criteria for VAT exemption
In the current case law, the CJEU specified further the respective criteria. According to the CJEU, the following criteria must be met to qualify for the VAT exemption:
- Distinct or autonomous character: First of all, it has to be determined whether the services provided by a third party are forming a distinct whole. However, as the CJEU states, it is not required that the services which are specific to and essential for the management of special investment funds must be completely outsourced to the service provider to be covered by the tax exemption which is a fundamental and trend-setting statement in the current legal case. If the application of the tax exemption required the entire outsourcing of the services, management companies which themselves supply those services and economic operators who invest directly, would be favoured from a tax point of view.
- Specific and essential character of the service: In a second step, it has to be assessed whether the services provided by a third party are specific to and essential for the management of special investment funds. It is crucial that the services provided are closely linked to the activities of the management company. Regarding services provided by a third party to a management company, it has to be examined “whether the service provided … is intrinsically connected to the activity characteristic of a management company, so that it has the effect of performing the specific and essential functions of management of a special investment fund.” Instead, services which arise regarding any type of investment are not specific and not covered by the term management of special investment funds.
If you would like to know the conclusion of the judgement and our detailed analysis, you can read the full article in the WTS Global Financial Services Newsletter #3/2021. Click here and scroll to page 4!
If you need more information about the aforementioned Austrian cases or the judgement concerning the VAT exemption for the management of special investment funds, please contact the experts of ICON Wirtschaftstreuhand GmbH, partner firm of WTS Global in Austria!