VAT EXEMPTION ON MANAGEMENT OF SPECIAL INVESTMENT FUNDS – A MOVING TARGET Mark Grech – Deloitte Services Limited

Management of Special Investment Funds Article 135(1)(g) of the VAT Directive Member States shall exempt the following transactions: “The management of special investment funds as defined by Member States.”

Exemptions – Restrictive Interpretation  General rule is that VAT should be levied on all supplies of goods and services made for a consideration by a taxable person acting as such.  Exemptions to be restrictively interpreted IF A TRANSACTION IS NOT CLEARLY EXEMPT, IT IS CHARGEABLE TO VAT

Exemptions – Rationale VAT Exemptions – why?  Social considerations (e.g. health, education, housing)  Practical considerations (e.g. gambling, financial services)

Types of Exemptions  Solely by nature of the supply (e.g. transactions in shares and other securities)  By nature of the supply and the person providing it (e.g. granting of credit – exempt; negotiation of credit – exempt only if carried out by the person providing the credit)  By nature of the supply and the person receiving it (e.g. management of special investment funds as defined by Member States)

Why exempt fund management? ABBEY NATIONAL (C-169/04) “… the purpose of the exemption … of transactions connected with the management of special investment funds is, particularly, to facilitate investment in securities for small investors by means of investment undertakings. Point 6 of that provision is intended to ensure that the common system of VAT is fiscally neutral as regards the choice between direct investment in securities and investment through undertakings for collective investment.”

Abbey National (C-169/04) The management of special investment funds as defined by Member States Are Member States allowed to define both which services fall under “management” and which funds classify as “special investment funds”? Court ruled that management is a Community concept which Member States cannot alter. Discretion (within limits) is restricted to definition of SIFs

Abbey National (C-169/04) Do the services of an administrator and of a depositary constitute “management”? Principle – for services to fall within the meaning of management, “they must, viewed broadly, form a distinct whole, and are specific to, and essential for, the management of special investment funds”  Administrator – YES  Depositary – NO

Claverhouse (C-363/05) How wide is Member States’ discretion to define Special Investment Funds? UK argued for a very wide discretion. Court – the task of defining the meaning of the words “special investment funds” does not in any way permit the Member States to select certain funds located in their territory and grant them exemption and exclude other funds from that exemption

Claverhouse (C-363/05) The Sixth Directive only grants the Member States the power to define, in their domestic law, the funds which meet the definition of ‘special investment funds’ Once the term is defined, the exemption will apply to management services provided to those special investment funds that fall within the definition.

Claverhouse (C-363/05) Discretion to be used with fiscal neutrality in mind “the principle of fiscal neutrality … precludes economic operators carrying out the same transactions from being treated differently in relation to the levying of VAT. This principle does not require the transactions to be identical. If two services are sufficiently similar as to be in competition with each other, then the principle of fiscal neutrality would be breached if they are treated differently for VAT purposes.

Claverhouse (C-363/05) UK – Management of:  Open ended funds (both Authorised Unit Trusts and Open Ended Investment Companies) – EXEMPT  Closed ended funds (Investment Trust Companies) – TAXABLE Court – sufficiently similar in investors’ eyes. Exempting one and taxing other distorts competition

Claverhouse (C-363/05) Can the VAT directive be enforced in a national court? Court – if the provisions of a directive appear to be unconditional and sufficiently precise, they may be relied upon against any national provision which is incompatible with the directive

Wheels (C-424/11) Pension Scheme Pension Fund Wheels (Trustee) Capital International Limited Fund Management

Wheels (C-424/11) Can a Member State include open ended funds and closed ended funds but exclude pension funds from the exemption? Court –  Was the pension fund identical to an exempted fund? NO – it was not open to the public  Was the pension fund sufficiently comparable to an exempted fund? NO – the members did not bear the investment risk. Benefits were defined from the start.

GfbK (C-275/11) Fund Management Company GfbK Retail Fund Management Investment Advisory

GfbK (C-275/11) German tax authorities – investment advisory services provided to a fund do not fall within the term “management” Court - giving recommendations to a fund management company to purchase and sell assets are intrinsically connected to the activity characteristic of a fund management company, and therefore are exempt management services

GfbK (C-275/11) The Court also made reference to the principle of fiscal neutrality If investment selection services were to be subject to VAT, fund managers with their own investment advisors would be at an advantage over others that outsourced these services

ATP PensionService A/S (C-464/12) Pension Denmark ATP Pension Schemes Administrator Various administration services

ATP PensionService A/S (C-464/12) ATP – services were exempt under the exemption relating to payments and transfers Danish tax authorities – dissected the services provided by ATP and argued that many of them did not fall under “payments or transfers” services ATP’s counter argument – in any case Pension Denmark is a special investment fund and its management should be exempt

ATP PensionService A/S (C-464/12) Court –  Members bore the investment risk (defined contribution scheme);  Savings were invested using a risk spreading principle Sufficiently comparable to exempted special investment funds and therefore their management should be exempt too, in view of fiscal neutrality.

Fiscale Eenheid (C-595/13) (AG Opinion) Pension Funds Property Company A Beheer BV* Various administration services *Part of Fiscale Eenheid VAT Group

Fiscale Eenheid (C-595/13) (AG Opinion) Question Can a company that was set up to invest in a portfolio consisting of immovable property be considered as a special investment fund? Advocate General If there is a pooling of investors and the company is regulated by the authorities, it is sufficiently comparable to special investment funds

Fiscale Eenheid (C-595/13) (AG Opinion) Question Does the concept of management extend to the management of the properties themselves? Advocate General Management includes anything that needs to be done to maintain the assets in order to continue to derive income therefrom

Fiscale Eenheid (C-595/13) (AG Opinion) Advocate General If assets consist of securities, management may just consist of exercising voting rights and the returns from the assets will flow ‘automatically’. If assets consist of property, the manager has to be more directly involved in the management function. Recommending to the Court to decide that property management falls under exempt management services

Malta – Schedule 5, Part 2, Item 3(6) “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: Provided that investment schemes shall refer to collective investment schemes as defined under the Investment Services Act and retirement schemes as defined under the Special Funds (Regulation) Act.”

Malta – Schedule 5, Part 2, Item 3(6) Part 1 of definition: “Collective investment schemes as defined in the Investment Services Act” Investment Services Act: “Any scheme or arrangement which has as its object or as one of its objects the collective investment of capital acquired by means of an offer of units for subscription, sale or exchange and which has the following characteristics: (a) the scheme or arrangement operates according to the principle of risk spreading; and either

Malta – Schedule 5, Part 2, Item 3(6) (b) the contributions of the participants and the profits or income out of which payments are to be made to them are pooled; or (c) at the request of the holders, units are or are to be repurchased or redeemed out of the assets of the scheme or arrangement, continuously or in blocks at short intervals; or (d) units are, or have been, or will be issued continuously or in blocks at short intervals.”

Malta – Schedule 5, Part 2, Item 3(6) Thus, the management of an entity that falls within this definition, whether established in Malta or not, is VAT exempt without the right to input VAT recovery.

Malta – Schedule 5, Part 2, Item 3(6) Part 2 of definition: “retirement schemes as defined under the Special Funds (Regulation) Act.” The Special Funds (Regulation) Act has been repealed and replaced by the Retirement Pensions Act in Retirement schemes in the RPA include both defined benefit and defined contribution schemes.

Mismatches in interpretation Do they matter? VAT opportunities arising from mismatches If fund does not qualify as a SIF in Country X but qualifies as a SIF in Country Y, then: Fund Manager (Country X) Fund Manager (Country X) Fund (Country Y) Fund management services

Mismatches in interpretation In Country X: Management of fund is in principle taxable; no VAT charged as place of supply is in country Y (B2B supply of services) – INPUT VAT IS RECOVERABLE because had the supply been made in Country X it would have been subject to VAT. In Country Y: Management of fund is exempt; no requirement to reverse charge and pay VAT.

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