On 9 December 2015, the European Court of Justice (the Court) delivered its judgment in the landmark case Fiscale Eenheid X (C-595/13), which concerned the scope of the VAT exemption for the management of special investment funds. The Court ruled that a real estate fund can qualify as a "special investment fund" insofar it is subject to specific State supervision. The Court further ruled that the actual management of real estate in the case at hand cannot qualify as "management" within the meaning of the VAT exemption.
X is a VATable person that manages several entities that invest their capital in real estate. The capital was raised by pension funds and certificate holders. X takes care of all aspects relating to the management of the fund and the real estate, including the actual management of the real estate, which involves looking for suitable tenants and performing and supervising maintenance, etc. X treaded these services as VAT exempt. The Dutch tax authorities, however, took the view that these services cannot fall in the scope of the VAT exemption for the management of special investment funds. The Dutch Supreme Court has doubts with regard to the scope of the VAT exemption and referred the case to the Court for clarification.
The first preliminary question of the Dutch Supreme Court is whether an entity that invests in real estate can qualify as a "special investment fund". The Court considers that a real estate fund can qualify as a special investment fund insofar it is subject to specific State supervision. This is a new requirement. The type of assets in which the fund invests is not decisive. Therefore, a real estate fund can indeed qualify as "special investment fund" insofar it is subject to specific State supervision.
The second question is whether the actual management of the real estate can also qualify as "management" of such a special investment fund. While the "management" of a special investment fund is exempt, the Court considers that the actual management of the real estate is not specific for the management of a special investment fund. The actual management is an activity that applies to all types of investment. Activities with regard to the selection, purchase and sale of the assets (i.e. the real estate) and administrative activities are specific for the management of special investment funds and, therefore, exempt. It appears that activities relating to the fund fall inside the scope of the VAT exemption but activities relating to the assets of the fund does not.
This judgment is not just relevant to real estate funds and real estate fund managers, but to all types of investment funds. The requirement of specific State supervision is completely new and requires all parties, funds and their managers, to reconsider their position taken in the past. The VAT treatment of services to funds may shift from taxable to exempt and vice versa. The contracts must be examined to determine which party bears such VAT risks.
New questions arise on the scope of this requirement, such as whether a fund that is exempt from supervision can be considered to be subject to specific State supervision. Also the exact scope of the terms "management" and "actual management" is likely to become subject of discussions with tax authorities as a clear definition has not been given by the Court. Member States may have to amend their policy as to which types of funds under their local legislation can qualify as special investment fund.