In the joined cases of K and DBKAG (C-58/20 and C-59/20), the Court of Justice of the European Union (CJEU) has confirmed that the VAT exemption for special investment funds (SIFs) extends to the management of their tax-related responsibilities and the grant of a right to use specialised software used to carry out risk-management and performance-measurement functions, if intrinsically connected to, and provided exclusively for, the management of the funds.
K provided outsourced services to investment management companies. These services related to the provision to the tax authorities of tax statements in relation to unit-holders' affairs. The investment management companies remained ultimately responsible for the accuracy of the amounts declared. K invoiced its clients without VAT, relying on the investment management exemption provided for in Article 135(1)(g) of the Principal VAT Directive. The tax authorities considered that the service provided by K was not specific to and essential for the management of the funds, but rather an audit, or tax, related service that did not fall within the exemption.
DBKAG was granted a right to use software essential to risk management and performance measurement of investment funds in return for the payment of a fee. The provider sought to charge VAT on the licence fee for the software (by means of a reverse charge and seeking recovery of the tax debt from DBKAG).
Both cases were referred from the domestic courts (in Austria and Germany, respectively), to the CJEU, which proceeded to provide its judgment without an opinion from the Advocate-General.
The CJEU noted that the principle of fiscal neutrality required that the fund management exemption was to be interpreted so as not to exclude services that were not outsourced in their entirety. The CJEU referred to its decision in GfBk (C-275/11), where it had confirmed that it was necessary to examine whether the service provided by a third party was intrinsically connected to the activity characteristic of a management company, so as to have the effect of performing the specific and essential functions of management of a SIF. 'Management' covered not just investment management, but also administrative and accounting services where these were specific to the activity of a SIF (rather than inherent in any type of investment).
It was not necessarily the case that any type of IT service provided by a third party to a management company would be excluded from the scope of the exemption, and the mere fact that a service was performed entirely electronically would not prevent the exemption from applying. Where the grant of a right to use software was provided exclusively for SIF management purposes (and not provided to other funds) it would be considered 'specific' for the purposes of the exemption.
Why it matters: This judgment provides important guidance in relation to the scope of the VAT exemption for fund management, which has been construed broadly by the CJEU. Notwithstanding the UK's departure from the European Union, this judgment has important domestic ramifications for the UK's fund management industry.
The judgment can be viewed here.