On September 2, 2016 the Opinion issued by Advocate General (AG) Ettema in the Fiscal Unity X case was published. The Opinion follows on from the judgment rendered by the Court of Justice of the European Union (CJEU) in this case on December 9, 2015. The AG concludes that in assessing whether a fund is subject to ‘specific State supervision’ and thus qualifies as a special investment fund, attention must be paid to Dutch regulatory law (currently: the Financial Supervision Act). General administrative services and operational management services can be regarded as VAT-exempt ‘management’ of a special investment fund.
The taxpayer concluded management agreements with three companies that invest in real estate (“real estate funds”). The investors in these real estate funds are institutional investors. The activities performed by the taxpayer by virtue of the management agreements include the administration and management of the real estate funds, attracting investors, the purchase and sale of real estate, and property management.
The management of special investment funds is exempt from VAT. The Supreme Court asked the CJEU whether real estate funds qualify as special investment funds. It also wanted to know whether the actual property management is covered by the term ‘management’ within the meaning of the abovementioned exemption.
The CJEU ruled, in essence, that funds are only to be regarded as special investment funds if national law provides for ‘specific State supervision’. Moreover, the actual property management does not qualify as ‘management’ within the meaning of the VAT exemption. Following the ruling from the CJEU, the AG has now issued a further Opinion, before the Supreme Court renders its judgment in this case.
Analysis of the AG’s Opinion
In her Opinion, AG Ettema addresses the question what are special investment funds and, more in particular, what is meant by funds that are subject to ‘specific State supervision’ under national law. She also addresses the term ‘management’.
Special investment funds and specific State supervision
According to the CJEU, funds are only to be regarded as special investment funds if national law provides for ‘specific State supervision’. In the case at hand, which concerns 1996, what needs to be investigated therefore is whether the supervision required by the CJEU was present in that year. The AG concludes that the supervision applying in 1996 by virtue of the Investment Institutions Supervision Act (Wet toezicht beleggingsinstellingen; “Wtb”) can, in principle, be regarded as ‘specific State supervision’. However, if the fund is exempt from the obligation to obtain a license, the fund is not subject to ‘specific State supervision’, according to the AG. Given that the AG cannot establish whether the real estate funds in this case were subject to or exempt from the obligation to possess a license, the case must be remitted to a court of referral. According to the AG, a court of referral must investigate whether the funds in 1996 possessed a Wtb license or whether they were subject to another type of ‘specific State supervision’.
The Wtb no longer exists. As of January 1, 2007 this regulatory framework is laid down in the Financial Supervision Act (Wet op de financieel toezicht; “Wft”). At the EU-law level things have also changed, given that not only undertakings for collective investment in transferable securities (UCITS) are regulated, but so are managers of alternative investment funds (AIFs) by virtue of the Alternative Investment Fund Managers Directive (AIFM Directive). Because the AIFM Directive regulates managers and not the funds themselves, are the AIFs then subject to ‘specific State supervision’? AG Ettema infers from the CJEU judgment in the Fiscal Unity X case that this is the case. This applies to both securities funds and real estate funds.
The AG’s analysis of the expression ‘special investment fund’ and the requirement of ‘specific State supervision’ is broadly what was expected. It stands to reason that the Dutch Wft and the EU UCITS Directive and AIFM Directive will have to be assessed in order to establish whether there is a fund that can be regarded as a special investment fund. However, it remains to be seen how the Supreme Court will deal with the exemptions from mandatory supervision, if it will even express an opinion on this. As far as this aspect is concerned, another view than that of the AG is very well conceivable. For instance, certain small managers are not covered by the AIFM Directive, although they are registered with the Netherlands Authority for the Financial Markets (AFM).
The AG’s Opinion confirms the difference with current Dutch practice, which does not require a fund to be subject to supervision. It therefore appears that the VAT exemption will be curtailed in the Netherlands. For example, certain mutual funds, exempt investment institutions (vrijgestelde beleggingsinstellingen; “VBIs”) and fiscal investment institutions (fiscale beleggingsinstellingen; “FBIs”) may no longer qualify as special investment funds. The position taken by the Dutch Tax and Customs Administration appears for now to be one of continuing with current policy until the Supreme Court rules in the present case.
According to the CJEU, the actual management of property does not qualify as ‘management’, so that such services are not exempt anyway. With regard to the term ‘management’, according to the CJEU this must involve specific activities relating to the collective investment of the capital raised. Actual property management (including the lease, the management of existing leases, as well as the authorization of third parties and control of maintenance activities) is however not specific to the management of special investment funds, according to the CJEU.
In the present case the taxpayer performs various activities for the real estate funds. These activities are performed for a single ‘all-in’ fee. According to the AG, the parties do not dispute the fact that the acquisition and the sale of property and the acquisition of shareholders or certificate holders qualify as management. The difference of opinion arises with regard to the other activities. In this respect, three separate services are distinguished for VAT purposes according to the AG, i.e.
- 1) ‘the actual property management’, including the overseeing of properties and maintaining contact with tenants, engaging real estate agents, debt collection and credit management and performing minor maintenance,
- 2) general administrative services, and
- 3) the operational management of the real estate companies.
AG Ettema believes that the conclusions of the Court of Appeals Den Bosch − that the activities under 2) (general administrative activities) and 3) (operations management) can be regarded as ‘management’ − are factual and understandable. If the court of referral establishes that the funds are subject to ‘specific State supervision’, then that court must also still investigate how the all-in fee agreed for the activities must be split and allocated to the VAT-exempt ‘management’ and to the VAT-taxed ‘actual property management’.
The AG’s Opinion confirms that activities that are in the real estate practice referred to as ‘property management’ do not fall under the VAT exemption. The question that arose in response to the CJEU judgment in the Fiscal Unity X case, i.e. to what extent does asset management fall under the VAT exemption, remains pertinent even after the AG’s Opinion. Considerable importance is still also attached to whether there is one or more services (composite supply of services) for VAT purposes. The AG’s point of departure is that activities 1), 2) and 3) are separate services for VAT purposes, which must be assessed on their own VAT merits. This issue arises if, for example, fund management, asset management and property management are offered together. In practice, contractual relationships will have to be critically examined in order to judge what should be defined as VAT-taxed property management. If an all-in fee is charged for the services, then − as presumably is the case here − it will need to be assessed how the fee is to be split into a VAT-exempt and a VAT-taxed part.
The AG’s Opinion emphasizes how important it is for investment funds to determine how the CJEU judgment will potentially affect them. This applies both to real estate funds and funds that invest in other underlying assets (such as securities funds and cash-enhanced funds). Depending upon the supervision to which (the managers of ) these funds may be subject, the VAT exemption for the management of these funds may be canceled. In that case, VAT represents an expense item for funds that perform (partly) VAT-exempt activities. It is now up to the Supreme Court to provide clarity on this.
The tax advisors of Meijburg & Co’s Indirect Tax Financial Services Group and the Indirect Tax Real Estate Group would be pleased to help you identify how this case will impact your business and to offer constructive advice about how to limit the VAT burden on funds. Feel free to contact one of them or your regular contact for more information.