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Recent European VAT decision on real estate investment funds
AUTHOR(S): Turlough Galvin, Joe Duffy, Aidan Fahy, Catherine Galvin, Shane Hogan, Alan Keating, Greg Lockhart, Catherine O’Meara, Mark O’Sullivan, Liam Quirke, John Ryan, Gerry Thornton
PRACTICE AREA GROUP: Tax, Structured Finance and Securitisation
The Court of Justice of the European Union (the “CJEU”) delivered its decision in the Fiscale Eenheid X (C-595/13) case on 9 December 2015. The case relates to the VAT exemption applied to investment management services supplied to special investment funds.
The decision in this case is of particular interest and relevance to Irish special investment funds that invest in real estate and considered two questions:
- whether funds which invest solely in real estate may qualify as special investment funds (in which case the supply of investment management services to such funds should be exempt from VAT). The CJEU confirmed this was the case;
- whether the investment management services provided (which included the actual day to day management of real estate) qualified as exempt investment management services. The CJEU concluded that the exemption did not extend to day to day property management services. This conclusion is in keeping with the treatment applied to such services in Ireland to date.
The case was brought by a Dutch fund manager that provided its services to several Dutch real estate funds. The manager provided assistance to the funds in all aspects of their investments including the purchase, rental and sale of real estate. The manager also carried out the day to day maintenance and management of the properties owned by the funds. The manager considered its services came within the scope of the investment management exemption and therefore did not account for VAT on its services to the Dutch funds.
The Dutch tax authorities unsuccessfully challenged the treatment in the Dutch courts and ultimately the two questions set out above were referred to the CJEU for determination.
Management services to real estate funds – VAT exempt?
The CJEU was asked whether those funds which invest solely in real estate qualified as special investment funds, in which case the supply of investment management services to such funds should be exempt from VAT. The CJEU confirmed that the assets which a fund invested in were not relevant to whether the fund was a special investment fund, with various other criteria being more relevant to determining the scope of an EU Member State’s discretion to specify different funds for the purposes of the exemption.
Based upon the above, the CJEU confirmed that a fund which invests solely in real estate may qualify. This decision will be welcomed by Irish funds of the types specified in Irish VAT legislation which are invested solely in real estate as it confirms their current entitlement to receive investment management services exempt from VAT.
Property management services – VAT exempt?
The CJEU was also asked whether the investment management services, including the actual day to day property management of the real estate, qualified as exempt investment management services. The CJEU concluded that actual management of real estate did not qualify as investment management services which fall within the exemption.
As a result, such property management services will remain subject to VAT and the property manager will continue to be entitled to recover VAT incurred in providing such services, including for example, on building services purchased to develop the real estate. The fund may recover such VAT charged to it on day to day activities provided its letting activity is subject to VAT. This is in keeping with the treatment applied in Ireland to such services to date.
The decision of the CJEU in Fiscale Eenheid X is specific to the arrangements agreed by the Dutch funds and fund manager. No changes to Irish legislation are required as it confirms the Irish VAT position that has historically applied to Irish real estate funds.
If you would like to discuss any aspect of the decision in Fiscale Eenheid X, please speak to your usual Matheson contact or to any of our Tax partners.