On 7 March 2013, the Court of Justice of the European Union (“CJEU”) confirmed in the “GfBK” case (C-275/11) that fund investment advisory services supplied by a third party to an investment fund management company, necessarily fall under the notion of ‘management of special investment funds’ and therefore benefit from the VAT exemption.
Investment funds normally do not have the right to deduct VAT, which means that all the VAT is a final charge and affects their net return on investment. To avoid undesired VAT costs in the investment fund management sector, the European VAT Directive provides for a specific VAT exemption for the management of ‘special investment funds’. The exact definition of such funds is left to the discretion of the individual member states of the European Union. In the Netherlands, the management of both regulated and non-regulated collective investment funds is exempt from VAT. This means that if a collective investment fund outsources its management, no VAT is due on the management fee. The CJEU already confirmed that the VAT exemption for management of special investment funds should be understood as applying to all services which are ‘specific’ to the management of an investment fund.
The GfBK case dealt with the question of whether the VAT exemption extends to fund investment advisory services provided by a third party to an investment fund management company. In the GfBK case it was common ground that the customer of the investment fund management company was a special investment fund. Therefore, the services of the investment fund management company benefited from the VAT exemption. However, the Tax Authorities claimed that the services from the third party could not benefit from the VAT exemption. The CJEU ruled that fund investment advisory services which are intrinsically connected to the activity characteristic of an investment fund are specific to, and essential for, the fund, and could as such benefit from the VAT exemption for fund management services, regardless the fact that the services are delegated to a third party. According to the CJEU it is irrelevant that the third party may not have any decision making authority at the level of the investment fund.
For the Dutch fund industry this recent decision confirms that no VAT should be payable by a collective investment fund or its investment fund management company when outsourcing fund investment advisory services.