On 17 June 2021, the Court of Justice of the European Union (CJEU) rendered two decisions[1] about the application of the VAT exemption for management services provided in article 135 (1) (g) of the EU VAT Directive and implemented in article 44 (1) (d) of the Luxembourg VAT law.
Overview of the cases
In the first case, several management companies outsourced services to a third-party, including the calculation of income at the level of the funds and the preparation of the tax returns to be filed by the companies. The third-party was liable to the management companies in case of an inaccuracy of the declaration of the relevant calculations for tax purposes causing damage.
In the second case, a company managing special investment funds asked for services by an external supplier who provided the right to access a software, essential to assess risk management and performance measurement. The software was specifically designed for investments funds and was further integrated to the company’s existing software. The software performed the calculations of risk and performance based on data entered in the system by the company. These amounts were then used to establish reports in order to provide information to the tax authorities and investors. The supplier also provided support services.
The question at issue in both cases concerned the VAT treatment of such services: were they supposed to benefit from the VAT exemption for management services?
Position of the CJEU
The CJEU reminds that in order to be classified as exempt transactions within the meaning of Article 135 (1) (g) of the VAT Directive, the services provided by a third-party manager must, viewed broadly, form a distinct whole fulfilling in effect the specific, essential functions of the management of special investment funds. However, it is not necessary for a service to be outsourced in its entirety for it to form a distinct whole.
This position may have an influence in the future over the position of the Luxembourg VAT authorities which stated in circular 723bis of 20 April 2010 that single isolated type of service would be outside the scope of the VAT exemption for the administrative management of the fund.
Moreover, the CJEU explains that the concept of management of special investment funds does not only cover management functions but also administrative tasks such as accounting, computing the amount of income and the price of units or shares, the valuation of assets, the preparation of statements for the distribution of income, the provision of information and documentation for accounting and tax purposes and the preparation of income forecasts.
However, the CJEU confirms a precedent position[2] stating that in order to be VAT exempt, such services must be intrinsically connected to the activity of management of the funds. If the services can be used for the management of special investment funds and also other types of investments, the VAT exemption must not apply. The right to use a software that is provided exclusively for the purpose of managing special investment funds and not other funds would thus fall within the scope of the VAT exemption.
Conclusion
The CJEU clarifies the scope of the VAT exemption for management services. To fall within the scope of this exemption, the services should be intrinsically connected to the management of special investment funds and provided exclusively for the purpose of managing such funds even if they are not outsourced in their entirety.
Position of local courts and tax administration may be influenced by this jurisprudence. The ones involved in investment fund activities should consider these new developments for the VAT treatment of outsourced management services, especially in respect of the use of a software and fund administration services.
Yann Ricard was a contributing author to this insight.
[1] C-58/20 and C-59/20
[2] Blackrock Investment Management (C 231/19)
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