On December 9, 2015, the Court of Justice of the European Union (“CJEU”) ruled in the Dutch Fiscale Eenheid X case (C-595/13) that the VAT exemption for the management of special investment funds applies to regulated funds. According to the CJEU, this may also include real estate funds. The actual property management in such funds does not qualify as management and is therefore not exempt.
The taxpayer concluded management agreements with three companies that invest in real estate (‘real estate investment funds’). The investors in these real estate investment funds are institutional investors. The activities performed by the taxpayer by virtue of the management agreements consist of the administration and management of the real estate investment funds, attracting investors, the purchase and sale of real estate and the actual management of the property.
The management of special investment funds is exempt from VAT. The Supreme Court asked the CJEU whether real estate investment funds qualify as special investment funds. The Supreme Court also wanted to know whether the actual management of the property is covered by the term ‘management’ within the meaning of the abovementioned exemption.
Analysis of CJEU judgment
The CJEU begins its judgment with an explanation of the assumptions underlying the exemption. It makes reference in this respect to the purpose of the exemption, which is to facilitate investment in securities by investors through investment undertakings. Unlike a number of previous judgments, the CJEU does not refer to “small investors”. The exemption therefore does not only apply to funds for retail investors, but also to funds for institutional investors (which was the situation in the present case). This is a confirmation of current Dutch practice.
Special investment funds
According to the CJEU, to answer the question whether there is a special investment fund, the nature of the investments is irrelevant. Funds that invest in real estate may therefore also fall under the exemption. This is also a confirmation of current Dutch practice.
In its explanation of the term ‘special investment funds’, the CJEU does however attach great importance to supervision. While the term ‘special investment funds’ could be defined by the Member States in the past, the CJEU now limits this freedom by making a connection to specific State supervision. The CJEU thus follows the line of the Opinion issued by the Advocate General. This means that undertakings for collective investment in transferable securities (’UCITS’) qualify as special investment funds. The CJEU appears to have the same opinion about funds that fall under the Alternative Investment Fund Managers Directive (’AIFM Directive’) (although strictly speaking this directive only regulates the managers and not the funds).
In previous case law, the exemption also appeared to apply to funds that have the same characteristics as UCITS, or at least display features that are sufficiently comparable for them to be in competition with UCITS. The CJEU now, however, appears to follow the line that the hurdle of specific State supervision must first be taken before a fund can be regarded as comparable. A number of characteristics must subsequently be fulfilled in order to actually qualify as a special investment fund. These characteristics appear to correspond with the current Dutch definition of special investment fund. According to this Dutch definition:
- at least two participants must be involved;
- who invest (part of) their capital in a separate fund;
- that qualifies as an investment institution within the meaning of the Financial Supervision Act (‘Wet op het financieel toezicht’) or is comparable with this;
- in the sense that investments are actually collectively made in underlying assets;
- and also that the risk is jointly run.
However, a major difference with the explanation of the CJEU is that, according to the CJEU, a fund should be regulated, whereas this is not the case under the current Dutch definition. This explanation may lead to a curtailment of the exemption in the Netherlands. Thus, 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. This curtailment does not apply to pension funds, however, since they are already under specific State supervision. Such funds must therefore only satisfy the abovementioned characteristics (as determined in the European ATP judgment). However, the CJEU judgment may affect pension funds (and other institutional investors) that invest in foreign (US, for example) funds. If these foreign funds do not, or no longer, fall under the exemption, the pension funds may have to pay the reverse charged VAT on the management of these funds.
The question is what the actual impact of the judgment will be in practice. It is not clear from the judgment how supervision should be regulated at the national level. For example, it is not clear whether the supervision should always take place at the level of the fund itself. In addition, there are also a number of funds that are in principle subject to supervision, but are subsequently mandatorily exempt from this. The question is therefore whether it is sufficient if a fund may fall under a supervision directive, or that it is mandatory for it to be actually subject to supervision. It is also relevant what ‘supervision’ exactly means. 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”). Further analysis is thus required to determine exactly how the judgment of the CJEU should be interpreted and applied.
According to the CJEU, the actual management of the 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 letting, the management of existing tenancies, as well as delegation to other third parties and monitoring of maintenance works) is however not specifically for the management of a special investment fund, according to the CJEU.
The activities referred to as ‘property management’ in real estate practice therefore do not fall under the exemption. The contractual relationships will have to be critically examined to assess what should be defined as VAT-taxed property management. The question also arises whether asset management falls under the VAT exemption. In this respect, the VAT issue concerning one or more services (composite supply of services) is very important. This may, for example, play a role if fund management, asset management and property management are offered together.
It is essential for investment funds to determine the potential impact of the judgment of the CJEU. The judgment is not only important for real estate funds, but also for funds that invest in other underlying assets (such as securities funds and cash-enhanced funds). Depending upon the supervision to which these funds may be subject, it is possible that the VAT exemption for the management of these funds will be canceled. In that case, VAT represents a cost for funds that (partly) perform VAT-exempt activities.
The question is whether a possible change of Dutch policy on the basis of this judgment has retroactive effect. However, it seems reasonable to expect from a government that it will not apply the judgment retroactively. Such a policy change cannot be ruled out for the future, however.
Finally, we would like to point out that the practice in other EU countries may differ from current Dutch practice. The United Kingdom, for example, already has a policy that only regulated investment funds qualify as special investment funds. The CJEU judgment may therefore have different consequences at the European level. We can of course identify these consequences for you.
The tax advisors of the Indirect Tax Financial Services Group and the Indirect Tax Real Estate Group of Meijburg & Co would be pleased to help you identify the possible impact of this judgment on your business. Feel free to contact one of them or your regular contact for more information.