On 9 December 2015 the ECJ has issued a ruling regarding the scope of the VAT exemption for management of special investments funds. The ECJ has decided that the management of real estate funds may qualify as exempt fund management. The case in question is Fiscale Eenheid X NV (C-595/13).
According to the ECJ, in order to qualify for the exemption an investment fund must be regulated (i.e. subject to governmental supervision). Consequently, the management of a regulated real estate fund is exempt from VAT. However, property management of real estate held by such fund cannot benefit from the VAT exemption for fund management according to the ECJ. This newsflash will briefly discuss the implications of this ruling for the Netherlands, Luxembourg and Belgium.
Facts of the case
The case concerns a real estate fund management company rendering its services to three companies, investing in real estate. The manager considered its services to be VAT exempt under the exemption for the management of collective investment funds. The services provided by the management company included portfolio management, property management, (financial) administration services, directorship services and managing investor relations. Contrary to the viewpoint of the fund management company, the Dutch tax authorities argued that the VAT exemption does not apply to the services rendered by the fund management company. The Dutch Supreme Court referred preliminary questions to the ECJ. The questions were (i) whether an entity investing solely in real estate may be considered an investment fund within the meaning of the VAT exemption and (ii) whether the exploitation of the real estate (property management) qualifies as exempt fund management.
Ruling of the ECJ
According to the ECJ, a company investing in real estate can qualify as an investment fund in the meaning of the VAT exemption if it is subject to a regulatory regime. The fact that the company invests in real estate does not preclude qualification as a special investment fund. The ECJ does not specify the extent to which an investment fund (or its manager) has to be subject to a regulatory regime.
With respect to the question whether property management services may benefit from the VAT exemption, the ECJ considered that property management services are not specific to the management of an investment fund and therefore subject to VAT.
Consequences for the fund practice / remaining questions
In the Netherlands the VAT exemption for fund management has always been applied irrespective of whether the fund (or its manager) is subject to a regulatory regime. The ruling of the ECJ should likely have consequences for management of unregulated funds that is currently being treated as VAT exempt. In this respect, it is not clear to which extent a fund (or its manager) has to be subject to a regulatory regime in order to qualify for the exemption. For example, the question arises whether a manager registered with the financial authority but exempt from requiring a license, qualifies for the VAT exemption.
Property management of real estate as such – whether or not with respect to funds in particular – is currently generally treated as VAT taxed. In this respect, the ruling of the ECJ should not have any consequences for the Dutch VAT practice. However, fund management of real estate funds – in particular regulated ones – is in some cases currently treated as VAT exempt. Such fund management may include elements which could be considered property management. In this respect, the question arises whether the VAT exemption may still be applied in full. This would have to be analysed on a case to case basis.
In Luxembourg, article 44, 1, d) of the Luxembourg VAT law providing the VAT exemption for management services of regulated funds, does not specify the kind of investments the funds are entitled to perform to benefit from the VAT exemption. The discussed ECJ case provides legal certainty as it confirms the Luxembourg practice that the management of regulated investment funds is VAT exempt if the services are specific and essential for the management of the fund, whereas the actual immovable property management (exploitation) is not VAT exempt.
In Belgium, the VAT exemption for management of special investments funds applies to all kinds of regulated collective investment funds, which are undertakings for collective investment as referred to in the Act of 3 August 2012 relative to certain forms of collective management of investment portfolios. The VAT exemption also applies to public or institutional Regulated Real Estate Companies as referred to in Article 2, 1°, 2° and 3° of the Act of 12 May 2014 relative to regulated real estate companies, and to certain pension funds structured as a separate legal entity as referred to in Article 8 of the Act of
27 October 2006.
Real Estate Investment Companies with fixed Capital or REIC (institutionele vastgoedbevak / SICAFI institutionnelle) and Regulated Real Estate Companies or REC (gereglementeerde vastgoedvennootschap / société immobilière réglementée) thus fall into the scope of the Belgian VAT exemption for management of special investment funds. Consequently, in Belgium, the management of these regulated real estate funds is already VAT exempt.
However, the Belgian VAT exemption does not refer to all regulated funds as such. For example, the exemption does not refer to the funds which fall within the scope of the AIFM-Directive 2011/61/EU and the Belgian AIFM-Act of 19 April 2014 resulting therefrom. Consequently, the exemption does not include all types of regulated Alternative Investment Funds (i.e. the non-UCITS funds).
As the ECJ in its judgement established that the VAT exemption for ‘management of special investment funds’ applies to investment undertakings that are subject to specific supervision at national level, this leads to a broader interpretation of the current Belgian VAT exemption also including all types of regulated Alternative Investment Funds, although these are not mentioned in the text of the VAT exemption in the Belgian VAT Code. Please note that it is expected that the wording of the Belgian VAT exemption will be adapted following the AIFM-Act.
The ECJ also judged that the VAT exemption for ‘management of special investment funds’ must be interpreted as meaning that the term ‘management’ does not cover the actual management or exploitation of the immovable property of a special investment fund. With respect to property management of real estate funds in particular, this is currently generally treated as VAT taxed. Therefore, the judgement of the ECJ should not have any significant consequences for the Belgian VAT practice in this respect.