On 9 December 2015 the European Court of Justice ("ECJ") decided in the Dutch case Fiscale Eenheid X NV (C-595/13) that funds investing directly in real state can qualify as "special investment fund" for the purposes of the VAT exemption under the EU VAT Directive. Accordingly, the management of such "special investment fund" is exempt from VAT. Furthermore, the ECJ ruled that, in the case at hand, the actual management of real estate owned by the fund does not qualify as "management" within the meaning of the VAT exemption.
This is a long-awaited landmark decision where the ECJ confirmed that the exemption for collective investment funds is not limited to funds investing in securities and can also apply to funds investing in real estate.
The Dutch fund manager manages several Dutch real estate funds which are owned and funded mainly by pensions funds. The Dutch real estate funds are engaged in buying, selling and renting real estate assets. The Dutch fund manager is responsible for all aspects relating to the management of the fund and the properties, including the actual day to day management (i.e. looking for tenants, maintenance, supervisions).
The Dutch fund manager did not account for VAT on the fees charged to the Dutch real estate companies, taking the position that such services would qualify to the exemption intended for management of special investment funds. The tax authorities issued a VAT assessment in disagreement with the position and after favorable decisions to the Dutch fund manager the case reached the Dutch Supreme Court, which has referred questions to the ECJ to confirm whether real estate funds qualify as special investment funds and, if so, whether the exemption also applies to the actual property management. The Advocate General in her opinion advised the ECJ to answer both questions in the affirmative.
According to the ECJ, the type of assets in which the fund invests is not decisive for the analysis and a real estate fund can qualify as a special investment fund provided that the fund is subject to regulatory supervision in the country of incorporation. Furthermore, ECJ considered that, although the management of a special investment fund is exempt, the actual management of the properties is not specific to the management of the fund itself. The various activities connect with the capital raised (e.g. purchase and sale of the assets and the administrative activities) are specific for the management of the special investment fund and, therefore, exempt. The activities intended to preserve and build up the assets invested should not fall in the scope of exempt management activities.
The ECJ decision is relevant not only for funds investing in real estate, but also for funds investing in other types of assets. The requirement of regulatory supervision for qualifying as a special investment fund is a new point that should be considered in order to confirm that the VAT exemption applies to services provided to the funds. In practice, the VAT exemption should apply at least to ICBE and AIFMD funds.
Moreover, the exact scope of the term "management" may give rise to discussions with tax authorities. The activities relating to the fund should qualify for the VAT exemption but activities related to the assets of such funds would not fall under the scope of the exemption.
The funds, managers and service providers need to analyze the relevant contractual agreements to assess the practical implications of the ECJ decision. The VAT treatment of services provided to the funds may change and affect the overall VAT position of such funds.