A Closer Look at two Tax Exemption Cases

Two legal judgments regarding VAT exemption in the management of special investment funds.

As per VAT directive 2006/112/EC, Article 135 (1) (g), EU member states shall exempt the management of special investment funds, leaving it to member states to define what constitutes a special investment fund. However, questions arise when it comes to what falls under the umbrella of ‘management’ and to what extent services are exempt. This plays an instrumental part in VAT planning as costs may increase by the applicable VAT rate in the country in which the fund or management company is located.

CJ cases on exempt services
Case 1: C-275/11 GfBk Gesellschaft für Börsenkommunikation mbH (GfBk)

The facts
GfBk, a German investment manager, provided advice to one of its clients, a fund manager, on the management of the fund. Services also included monitoring the fund and providing buy and sell recommendations within certain risk and investment parameters set by the fund manager. The final responsibility on investment decisions was retained by the client. The fund manager processed the recommendations received from GfBk, often within a few minutes of receiving them, after checking to make sure that they did not deviate from the investment restrictions. For its advice, GfBk was remunerated on the basis of a percentage of the average monthly value of the investment fund. In this context, questions were raised to the European Court of Justice (ECJ) as to the qualification of VAT ex-emption for services rendered by GfBk.

Conclusions of the case
In its judgement the ECJ held that, despite being outsourced, advisory services concerning transferable securities that are provided by a third party to an investment management company, the manager of a special investment fund, fall within the exemption. This applies even if the third party has not acted on the basis of a mandate within the meaning of Article 5g of the UCITS Directive regulating investment funds. The ECJ’s decision in relation to the GfBk case went further, clarifying that the exemption applies to investment advisory services even if they are not considered to be core services in the ‘non-exhaustive’ list of services in Annex II of the UCITS directive. This conclusion was based on the concept of intrinsic connection. In effect, although delegated to a third party, the provision of recommendations to a fund manager are deemed to be ‘intrinsically connected’ to the fund manager’s activities and hence specific to and essential for the management of special investment funds.

Points to consider
From this judgement, it was clear that outsourcing of the management activities, given that they are intrinsically connected and specific to and essential for the management of special investment funds, would still be considered as exempt from VAT.

Case 2: C-424/11 Wheels Common Investment Fund Trustees Ltd and Other (Wheels)

The facts
Wheels is the trustee of a fund pooling for investment purposes the assets of occupational pension programs established by the Ford Motor Company in order to meet its obligations under national legislation and collective agreements. This case concerned whether defined benefit occupational pension programs fall under the term “special investment funds.”

Conclusions of the case
It was ruled that an investment fund pooling the assets of a retirement pension program is not a special investment fund for which the members of the program do not bear the risk arising from the management of the fund, and the contributions which the employer pays into the program are a means to comply with legal obligations towards its employees. Accordingly the management of such programs falls outside the scope of the VAT exemption.

Such programs were differentiated from funds which undertake investment in transferable securities on the following grounds:

• Unlike private investors in a collective investment fund, employees do not bear the investment risk
• The employer contributions are made as a consequence of the legal obligation it has with its employees rather than purely for investment reasons
• A pension fund is not open to public investments but constitutes an employment-related benefit by employers to their employees.

Points to consider
It is important to note that even though special investment funds are defined by member states, in this case the ECJ went further and investigated whether in actual fact the investment fund is a special investment fund. Due to the above conditions it was concluded that in fact it does not constitute a special investment fund, thus falling outside the scope of VAT exemption.

Author
Josef Debono
ECOVIS Malta Consultants Limited/Mdina Trust Services Limited, Balzan, Malta
josef.debono@ecovis.com