Management of closed KAGB funds possible without VAT

Ruling of 9.12.2015 in case C-595/13, “Fiscale Eenheid X” Problem

The management of funds can be exempt from value-added tax. Fund management includes certain administrative activities such as appraisals, accounting and reporting in addition to portfolio and risk management.

At present, Germany interprets the corresponding directives of the value-added tax system directive (Art. 135 (1) lit. g MwStSystRL) very strictly and limits tax exemption in accordance with Sect. 4 (8) lit. h UStG to “investment funds in the sense of the German Investment Tax Code”, among others. Thus tax-exempt management is only available for open funds that fulfil certain criteria at the time their assets are invested (such as a maximum of 20% prvate equity, generally only temporary borrowing). German lawmakers have entirely excluded the management of closed funds/investment assets from VAT exemption.

A new ruling of the ECT shows that the requirements under which German law has granted VAT exemption are too strict.

Facts of the matter

Fiscale Eenheid X N.V.c.s. is a real estate fund for institutional investors under the legal form of an incorporated company according to Dutch law. The investors can subscribe to shares at any time during the term of the fund. The fund forms one tax unit with a number of other companies (including a management company). For taxation purposes, they are treated as one company. The management company provided services for three additional companies that were not part of the aforementioned tax unit, that were founded through numerous pension funds and that deal with the sale and management of real estate. This also includes acting as the managing partner for the companies, managing the assets of the companies, especially their real estate, accounting, data processing and internal auditing.

The fund held the opinion that all of the activities of the management company fall under the tax exemption for the management of investment companies. The Dutch financial administration, on the other hand, held the position that only the purchase and sale of the real estate as well as the acquisition of new shareholders was exempt from VAT.

ECJ: Ruling of 9.12.2015 (C-595/13 Fiscale Eenheid X)

In the current ruling of 9.12.2015, the ECT more closely defined the requirements that an investment fund must fulfil in order to apply the VAT exemption. According to this, the deciding factor is that the fund is subject to governmental supervision. This governmental supervision can be the result of the UCITS directive or the AIFM directive. The fund also must be invested in a way that the risk is mixed. It is not relevant in which assets the fund invests (securities, real estate etc.)

The restrictive configuration of VAT exemption according to German law is thus contradictory to EU law after this ruling. The ECT described in its ruling the criteria on which it is to be determined whether an asset can be managed without VAT. The availability of a right of return was not listed as a criteria. It can therefore be assumed that a closed fund that is invested in a way that the risk is mixed and subject to governmental supervision due to the AIFM directive can be managed without being subject to VAT. According to the ECT ruling, the management of open funds can additionally also be VAT exempt if the criteria laid out by German lawmakers are not fulfilled.

The ECT did not only lay out in its ruling which criteria a fund must fulfil with regard to VAT exemption. It also determined with its ruling that providing facility management services for the fund real estate, as the “actual management of the immovable property of a special investment fund” is not part of fund management and therefore also cannot be provided without being subject to VAT. Facility management is not a service that is typical for funds,

Notes for practical application

According to the ruling of the European Court of Justice, more funds can be managed without VAT than previously possible, especially closed KAGB funds, if they are invested in a way that the risk is mixed.

As a result, capital management companies and service providers should test as quickly as possible what the effects of the ruling could be for you and determine whether there is a need for action:

• ƒIs the service provided exempt from VAT according to the criteria of the ECJ? ƒ 
• Can contract partners claim back VAT paid in the past? ƒ 
• Do service bundles need to be split up? ƒ 
• Do existing contracts require amending? ƒ 
• Are claims to pre-tax deductions no longer applicable?

How quickly German lawmakers will implement the provisions of the current ruling remains to be seen.

Capital management companies and service providers should refer to the value-added tax system directive (MwStSystRL) immediately and keep investments open.