Case Alert – Fiscale Eenheid X nv C-595/13
In December 2015 the European Court of Justice released its judgement in the case Fiscale Eenheid X nv (C-595/13) ruling that real estate funds can qualify as a “special investment fund”. The “management” of such funds being exempt from VAT. The Court further ruled that the actual management of real estate on the other hand cannot qualify as “management” within the meaning of the VAT exemption.
Fiscale Eenheid X nv manages several entities that invest their capital in real estate. The capital was raised by pension funds and certificate holders. X takes care of all aspects relating to the management of the fund and the real estate, including the actual management of the real estate, which involves looking for suitable tenants and performing and supervising maintenance, etc.
A number of preliminary question were put to the Dutch Supreme Court as follows:
- Can an entity that invests solely in real estate qualify as a “special investment fund”; and if it can;
- Whether the actual management of the real estate can also qualify as “management” of such a special investment fund.
Can a real estate fund qualify as a “special investment fund”?
The CJEU has confirmed that for VAT purposes, the nature of the underlying investment assets within the fund are irrelevant. There is no restriction in the VAT Directive which limits the scope of the exemption only to funds that invest in transferrable securities. The purpose of the VAT exemption for the management of special investment funds is to ensure equal treatment between direct investment (through a broker) and indirect investment through the pooling of funds.
According to established case law, a fund will qualify as a special investment fund for VAT purposes if (i) it pools the investments for the purpose of spreading risk, (ii) that risk is borne by the investors and (iii) the fund is subject to comparable state supervision. Whether the fund is subject to specific State supervision in the absence of supervision on the basis of EU law (e.g. UCITS Directive) is a new requirement.
The fact that, as in this case, the underlying assets are properties makes no difference. Therefore, a real estate fund can indeed qualify as “special investment fund”.
Can the actual management of real estate also qualify as “management”?
Although the “management” of a special investment fund is exempt from VAT, the Court considers that the actual management of the real estate is not specific for the management of a special investment fund.
The actual ‘management’ of the fund is an activity that applies to all types of investment. Activities with regard to the selection, purchase and sale of the assets (i.e. the real estate) and any necessary administration and accounting tasks for the management of special investment funds are therefore exempt.
Activities such as letting, management of existing tenancies and monitoring of maintenance works etc. are not ‘management’ services that qualify for VAT exemption.
Impact of this judgement
This judgment is not just relevant to real estate funds and real estate fund managers, but to all types of investment funds. The requirement of specific State supervision is completely new and requires all parties, funds and their managers, to reconsider their position taken in the past. The VAT treatment of services to funds may shift from taxable to exempt and vice versa. Where this happens contracts will need to be examined to determine which party bears such VAT risks.
There is likely to be opportunities for further input VAT recovery for funds and in particular for REIT’s as it is likely these will meet the three conditions to be treated as a special investment fund.
On the other hand property managers will need to consider the liability of their services and whether these constitute a single supply with one liability or a separate supply only partly falling within the exemption. This may impact input VAT recovery and a review of the partial exemption methodology may be required.
Further new questions arise on the scope of this requirement, such as whether a fund that is exempt from supervision can be considered to be subject to specific State supervision. Also the exact scope of the terms “management” and “actual management” is likely to become the subject of discussions with tax authorities as a clear definition has not been given by the Court.
It also appears likely that some EU Member States may have to amend their policy as to which types of funds under their local legislation can qualify as special investment funds.
Should you have any questions or wish to discuss the impact of this decision, please do not hesitate to get in contact with our VAT specialists on firstname.lastname@example.org