On 17 June 2021, the Court of Justice of the European Union (CJEU) released its decision in the joined cases of C-58/20 K and C-59/20 DBKAG (the judgment is not currently available in English). In its judgment, the CJEU held that tax services and licence fees are capable of falling under the fund management exemption when supplied in relation to special investment funds (SIFs).
Those involved in the fund management sector as providers or recipients of services may wish to consider the implications of the judgment, both for historical periods and for supplies going forward.
The CJEU’s judgment considers whether tax services and licence fees are capable of falling under the exemption for fund management when supplied to special investment funds (SIFs).
K provided various tax-related services in respect of SIFs, such as preparing tax accounts. It calculated income at the fund level using data provided by management companies and custodian banks. To establish the correct tax treatment, K had to, for example, reflect rules specific to the different types of investors. Although the management entities were responsible for the SIFs tax filings, they typically filed returns using the data provided, without modifying it.
K treated its services as VAT exempt under the management of SIFs at Article 135(1)(g) of the VAT Directive. The Tax Authorities challenged this, arguing that tax services were not ‘specific and essential’ to the management of a SIF and, thus, could not qualify for exemption.
In the case of DBKAG, DBKAG, an Austrian fund manager, was granted the right by SC GmbH, a German company, to use software to carry out calculations essential to risk and performance management. The software (SC software) was customised to reflect the funds under management. SC GmbH was also responsible for making correct calculations of risk and performance indicators with the SC software only to be used in conjunction with other DBKAG software. Although the software was customised, DBKAG was responsible for inputting the data to allow the software to calculate the required information.
SC GmbH charged an ongoing royalty fee for its grant of a licence. DBKAG considered that VAT was not due under the reverse charge as the supply of the software was exempt since it considered that calculating risk and performance indicators was specific and essential to the management of SIFs. DBKAG considered that its inputting of certain data to the software should not affect the VAT treatment. The Tax Authorities disagreed holding that the services were subject to VAT on the basis that SC GmbH only provided simple technical assistance. The Tax Authorities argued that since the SC software cannot perform the calculations in question without DBKAG’s involvement, the provision of the SC software was not sufficiently independent to qualify for exemption.
The CJEU stated it is clear from settled case-law that exemptions are to be interpreted strictly. However, by virtue of the principle of fiscal neutrality, businesses must be able to choose arrangements which suit them best, without running the risk of seeing their operations being excluded from the exemption (Blackrock).
Management services provided by a third-party manager fall, in principle, within the scope of Article 135(1)(g) (Abbey National). However, to be classified as exempt transactions, the services provided by a third-party manager must form a distinct whole, intended to satisfy specific and essential functions of the management of SIFs.
The CJEU held that Article 135(1)(g) of the VAT Directive must be interpreted as meaning that the supply of services provided to fund managers, such as specific taxation services, are capable of qualifying for exemption, but only to the extent those services have an intrinsic link with the management of SIFs and are required by law.
Similarly, the CJEU found that the provision of a software licence should fall under the exemption where it is used to perform calculations that are essential to the management of risk and calculation of yields, as required under local law or regulation in the context of fund management, and that software is used exclusively for the management of SIFs.
The CJEU noted that a service need not be outsourced in its entirety to qualify for VAT exemption. In the case of K, the CJEU held it was not relevant that the responsibility for filing returns remained with the management companies and not K. In the case of DBKAG, the CJEU addressed whether the services were ‘specific and essential’ to the management of SIFs, and determined it was not decisive that DBKAG was required to run the SC software and input data in order to perform the calculations.
The decision reflects the principles established in Abbey National and GFBK and refers to the strict application of the VAT exemption, and the decision will be binding in EU Member States.
The decision will broaden the application of the exemption to particular tax services provided in certain circumstances in the context of fund management. It is likely further litigation will follow as taxpayers seek to make claims to Tax Authorities. In the meantime, businesses should review their cost base and arrangements to assess whether any services are potentially capable of qualifying for VAT exemption. The judgment does not envisage that all tax or software services used by management companies can benefit from VAT exemption.
The European Commission is currently reviewing the VAT rules on Financial and Insurance Services.
EY’s EMEIA network can assist businesses to understand the impact of this judgment. With subject matter experts across Europe, EY is well placed to help businesses map and explore the VAT implications, identifying whether and where any additional VAT costs or potential savings may arise.
For further information, please contact one of the following or your usual EY contact:
Eamonn McCallion Eamonn.email@example.com 012211648
Brian Keenan Brian.firstname.lastname@example.org 012212487
Aideen Farrell email@example.com 061449896