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VAT Update: ECJ decision reduces risk of VAT costs arising for investment funds
The European Court of Justice released its decision on 7 March 2013 in the GfBk case (Case C-275/11) and clarified that the exemption from VAT for investment management services provided to special investment funds includes those services which are purely advisory and information services. In practice this should reduce the risk for investment funds of VAT arising on investment management services provided to them, and therefore the risk of a VAT cost arising for the investment fund.
Where VAT arises for investment funds, in the majority of cases it represents a real cost to the fund as it will not be recoverable, contrary to the position for many other businesses.
So as to reduce the impact of the fact that investment funds are unlikely to be entitled to recover VAT, it is important for an investment fund to ensure that most of the services provided to it by third parties qualify as exempt from VAT.
In this respect the most important VAT exemption is that for investment management services provided to “special investment funds”. Those “special investment funds” (as defined by each EU Member State) do not incur a VAT expense on their management fees. The scope of the exemption for services supplied to special investment funds has been examined by the ECJ on a number of occasions.
Previous ECJ decisions in respect of the investment management services VAT exemption
The seminal decision in this respect is that in Abbey National (Case C-169/04). In that case, the ECJ set out the criteria for services which qualify as management services for the purposes of applying the exemption. Those services which the ECJ addressed were limited to what the court referred to as “administrative management”. However, there has remained a lack of clarity as to whether it is necessary for a service to involve more than the provision of advice, such as the active delegation of decision making powers, etc, to qualify for the investment management exemption.
Additionally, in its recent decision in the Deutsche Bank AG case (Case C-44/11), the ECJ confirmed that the provision of investment management services supplied directly to individual investors does not qualify for the exemption from VAT. The ECJ stated that the exemption did not extend to such services as they were not provided to “special investment funds” as defined by the relevant EU Member State, but rather to individual clients.
The GfBk decision
With its decision on 7 March 2013 in the GfBk case (Case C-275/11), the ECJ has clarified the exemption from VAT for investment management services provided to special investment funds. The ECJ followed the Advocate General’s opinion in the case published on 8 November 2012.
Prior to this decision, it had generally been accepted in light of the Abbey National decision, that if investment management services were to qualify for the exemption they must grant the investment manager an active discretionary management element. However, the GfBK decision makes clear that where there is no discretion for the investment manager and the services provided are purely advisory and information services, such services may also qualify for the VAT exemption.
Of course such services, as set out in the Abbey National decision, must continue to involve specific and essential functions of the management of a special investment fund to qualify for exemption.
In practice, the GfBK decision should reduce the risk for investment funds of VAT arising on investment advisory services which are specific and essential to the overall management and function of the fund, provided to them, and therefore the risk of a VAT cost arising as a result.