Paul Hale and Martin Shah of Simmons & Simmons examine the implications of the BBL decision on the cross-border supply of fund management services.
In a decision that has been widely awaited, with some trepidation, within the fund management industry, the European Court of Justice held on 21 October that a Luxembourg SICAV (an open-ended investment company) carries on an economic activity for VAT purposes.
As a consequence, supplies of management services from a manager in one member state to a fund resident in another member state remain outside the scope of VAT, with the manager still entitled to recover attributable input VAT in full.
The decision leaves the position of managers of funds established outside the EC, and their ability to recover VAT, similarly unchanged.
Banque Bruxelles Lambert provided services to a Luxembourg SICAV. These services included the giving of assistance and advice and supply of information in the management of assets, and the giving of assistance in relation to acquisitions and disposals of investments.
BBL treated such supplies as outside the scope of Belgian VAT on the basis that the SICAV was a taxable person in Luxembourg (such that the reverse supply rules would apply in Luxembourg instead).
The Belgian tax authorities later discovered that Luxembourg did not treat the SICAV as a taxable person, and therefore the SICAV did not account for VAT there. Accordingly, they sought to assess BBL to Belgian output VAT on the supplies.
BBL appealed, contending that (a) the SICAV was properly viewed as a taxable entity or (b) the services provided fell within the exemption for "management of special investment funds as defined by member states".
The ECJ held that the activities of a collective investment scheme such as a SICAV do comprise an economic activity, being something more than the mere ownership of financial investments.
Investment activity comparable to that of a private investor who manages his own assets is not classified as an economic activity.
However, "transactions... which consist in drawing revenue on a continuing basis from activities which go beyond the compass of the simple acquisition and sale of securities, such as transactions carried out in the course of a business trading in securities" do qualify as an economic activity.
Since a SICAV uses capital provided by subscribers, when it purchases shares for a fee, to assemble and manage a portfolio with a view to generating profit, its activities are quite different in character to a mere owner of investments. As such, it is, in principle, a taxable person.
The Advocate General's opinion had considered that the fact that the SICAV may rely on an independent manager to manage its investments does not alter that analysis. The SICAV remains responsible for the investment activities, it merely
delegates some of its functions. The ECJ did not mention this issue at all.
The Sixth VAT Directive provides that the place of supply of consultancy services and banking and financial transactions carried out for a taxable person established in another member state is in the member state of the customer.
The ECJ held that this covers not only consultancy but also management where the manager has power to take decisions. Accordingly, the services of BBL were supplied in and were not subject to Belgian VAT.
Unfortunately, though predictably, the court refused the opportunity to consider further the meaning of the phrase "management of special investment funds", since it had decided the issue on the first of BBL's arguments.
Both the terms "management" and "special investment funds" have been the subject of much debate. The Advocate General had offered the opinion that "management" covers not only management services involving a power to make decisions but also transactions likely to have a direct effect on the financial position of investment funds, such as determining policies of investment and the acquisition and sale of shares.
Services that are easily dissociable from fund management in this narrow sense would not be covered by the exemption. The Advocate General did not deal specifically with the meaning of "special investment funds" although there is a suggestion in his opinion that "special investment funds" should, at least in part, be defined by reference to the UCITS Directive.
The decision leaves the status quo very much in place. Management services provided to an investment fund set up in a different member state will benefit from outside the scope treatment with a right to recover input VAT.
Management services provided to an investment fund set up in the same member state will be subject to VAT unless the fund has been treated as a "special investment fund", such as an authorised unit trust or openended investment company in the UK. In that case, the services are exempt and so the manager will suffer an input tax block.
The EU Commission has recognized that this situation is not sustainable but the time frame within which any changes may be introduced as part of the overall review of VAT and financial services and products is likely to be a long one.
The decision contains no overt comment on the mismatch of VAT treatment in different member states. The underlying assumption must be that the Luxembourg taxing authorities must now come into line and treat Luxembourg SICAVs and other collective investment schemes as taxable persons.
Whilst the supplies by overseas managers of services to them will not be subject to VAT charged by such managers, such a SICAV will be required to account for VAT under the reverse charge provisions unless such services fall within the "management of special investment funds" exemption. This, of course, is the position that has been adopted in Ireland.
Finally, the decision means that the position of persons who manage funds situated outside the EU has not changed. Their supplies continue to be outside the scope of VAT, but with the right to recover input tax.
It is to be hoped that any reform initiated by the EU Commission will not affect this valuable benefit for the European fund management community.
For further information please contact Paul Hale or Martin Shah at Simmons & Simmons, London.