ON 17 JUNE 2021, THE COURT OF JUSTICE OF THE EUROPEAN UNION (CJEU) RENDERED ITS JUDGMENT IN JOINED CASES K (C-58/20) AND DBKAG (C-59/20) DEALING WITH THE QUESTION OF WHICH CONDITIONS MUST EXIST IN ORDER FOR SERVICES RENDERED BY A THIRD-PARTY SUPPLIER TO THE MANAGEMENT COMPANY OF AN INVESTMENT FUND TO QUALIFY FOR THE VAT EXEMPTION FOR FUND MANAGEMENT SERVICES.
In the first case, a third-party supplier provided tax-related services consisting of ensuring that the income received by unit-holders from investment funds would be taxed in accordance with national law. In the second case, a third-party supplier granted a right to use specialist software designed solely for risk management and performance evaluation of qualifying investment funds.
The CJEU did not make a final substantive assessment as to whether the particular services in the present cases met the criteria for the VAT exemption, instead leaving that to the referring national courts.
The CJEU reiterated its case law establishing that in order to benefit from the VAT exemption, management services provided by a third-party manager must, viewed broadly, form a distinct whole and be specific to, and essential for, the management of special investment funds.
On the condition related to the “distinct or autonomous character” of the services, the CJEU clarified that a service need not be outsourced in its entirety in order to qualify for the exemption. Thus, partial outsourcing of management functions does not generally preclude the application of the VAT exemption.
On the condition related to the “specific and essential nature” of the service, the CJEU recalled that the VAT exemption for fund management services also covers administrative tasks (including, but not limited to, those set out under the heading ‘Administration’, in Annex II to Directive 85/611 as amended by Directive 2001/107). In order to fall within the scope of the VAT exemption, the third-party service must be intrinsically linked to the management company's own activity, so that it has the effect of fulfilling the specific and essential functions of the management of an investment fund.
In line with its recent decision in the Blackrock case (C-231/19), the CJEU clarified that the mere fact that a service is automated or carried out entirely by electronic means does not in itself prevent the exemption from being applied to that service.
The CJEU came to the conclusion that services provided by third parties to special investment fund management companies can benefit from the VAT exemption for fund management services if they have a close connection with the management of special investment funds and are provided exclusively for the purpose of managing special investment funds, even if they are not fully outsourced; this would include both tax-related work consisting of ensuring that the income received by unit-holders from investment funds is taxed in accordance with national law, as well as the granting of a right to use specialist software designed solely for risk management and performance evaluation of essential calculations.
This is a welcome decision illustrating that, based on the criteria established by the CJEU, any outsourced services provided by third parties to fund management companies can potentially be exempt from VAT, even if they are not fully outsourced, provided that the other relevant conditions set out by the CJEU are met. Fund management companies should therefore review their existing service agreements to check whether they are in line with this new case law.
The Arendt VAT team is at your disposal should you require any further information in this respect.