Recent VAT developments affecting
fund management services
Damien Fiott
www.fff-legal.com
Background
Directive 2006/112 and the VAT Act
• Directive 2006/112/EC [Art.135(1)(g)] contains a
mandatory VAT exemption in respect of the management
of special investment funds as defined by Member States
• Corresponding provision in the Maltese VAT Act
Schedule – Part 2 - Exempt without credit supplies]
[5th
The supply of services consisting of the management of
any investment scheme
provided that these services are limited to those
activities that are specific to and essential for the core
activity of the scheme….
Relevance of VAT to fund managers
Fund management services are generally
exempt from VAT...So what are the issues ?
“The VAT is a paradox…a tax in which those who
believe themselves exempt are taxed, and those
who believe themselves taxed, are generally
exempt…”
[Reuegebrink J., Omzetbelasting, FED Deventer, 1995]
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Relevance of VAT to fund managers
• Managers do not charge VAT on management
services
• Identifying exempt services
• Managers do no recover input VAT (attributable to
management services)
• VAT element is ultimately borne by the fund /
investors (‘cascading’ effect)
• treatment of outsourced management services ?
• Implications of non-exempt services ?
Relevance of VAT to fund managers
• Exemption was subject to different interpretations by
MS [partly due to MS’ discretion - the management
of special investment funds as defined by Member
States]
• Interpretation as to what constitutes ‘management’
and as to which types of funds fall within the scope of
the exemption
• Mismatch in interpretations can result in double VAT
charge or no taxation at all
• Exposure to tax and administrative action where VAT
is not properly accounted for
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ECJ contributions
Banque Bruxelles Lambert (BBL) C-08/03 (2004)
• a fund is a ‘taxable person’ for VAT purposes. From a fund
manager’s perspective, this is relevant in the context of
non-exempt services supplied to funds established in
other MS (B2B supplies)
Abbey National plc (C169/04) (2006)
• management is not limited to investment/portfolio
management but includes certain administrative services
• services performed by a 3rd party in respect of the
administrative management of the funds (as long as such
services form a distinct whole and are specific to and
essential for the management of those funds)
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ECJ contributions
JP Morgan Fleming Claverhouse Investment
Trust plc (C-363/05) (2007)
• Management services to UK investment trust
companies (close-ended) is exempt
• Relevance – equal treatment of different types
of funds (exemption should apply to all types
of funds)
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Recent Developments
2010 Place of supply rules
• Change in place of supply of services
• B2B - country where customer is established [BBL
(C08/03)]
• Obligation to register for VAT –
where fund manager buys in taxable services from a
non-Maltese service provider
supply of taxable services by fund manager
• Self-charging Maltese VAT on taxable services supplied
from non-Maltese service providers (ex: legal services
supplied by a UK law firm to a Maltese fund manager)
• Obligation to report non-exempt services to funds
established in other MS
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Recent Developments
LN425, 2010
Prior to LN 425, the exemption was limited to the
management of any investment scheme by a person duly
licensed or recognized under the Investment Services Act
Scope of amendment • Clarification of meaning of investment scheme ‘collective investment scheme’ as defined in the ISA and a
‘retirement scheme’ as defined in the Special Funds
(Regulation) Act
• Exemption applies irrespective of whether the fund
manager/service provider is licenced/recognised under the
ISA
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Recent Developments
2010 VAT Guidelines
• Purpose - to define ‘management’ for the
purposes of the VAT exemption
• Guidelines confirm that the exemption applies
to management as well as administration of
investment schemes
• Non-exhaustive list of activities which are
regarded as falling within the scope of the
exemption
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Recent Developments
2010 VAT Guidelines
Definition of management services
• Core Management
plus
• Investment selection
• Ancillary fund administration functions
• Custodian services supplied to the fund
…to the extent that these are limited to activities
that are specific to and essential for the core
activity of the scheme/fund
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Recent Developments
2010 VAT Guidelines
Non-exhaustive list of qualifying services • NAV calculation
• Reconciliation
• Investment Portfolio pricing
• Fund Accounting
• Performance Reporting
• Compliance Reporting
• Market Research
Exemption also applies to outsourced services
(Abbey National plc)
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Recent Developments
2010 VAT Guidelines
Non-Exempt services
Services that are not considered to be specific to
and essential for the core activity – typically,
consisting in services for the direct needs of the
fund manager or administrator. Examples • Accounting services supplied to Fund manager
• Payroll and back office services
• Serviced office space, Facilities management and
similar services
• Legal consultancy or advisory services supplied to
the fund manager
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Further developments ?
• Proposed amendments to the VAT Directive and
proposed new Council Regulation [COM(2007)746]
to implement certain measures relating to financial
services (including fund management)
• Purpose – to secure a uniform application of the VAT
exemption, achieve legal certainty and reduce
administrative burdens for operators
• Measures include the harmonisation of the concept
of fund management services
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Further developments ?
Proposed amendments to the Directive
• Rewording of exemption - management of
investment funds [current exemption refers to management of special investment funds as
defined by Member States ]
• ‘investment funds’ - undertakings for collective
investment in VAT exempted financial instruments
and real estate funds;
• ‘management’ - activities aimed at realising the
investment objectives of the fund
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Further developments ?
Proposed amendments to the Directive
• Introduction of an option for fund managers to
charge VAT (input Vat recovery)
• VAT Exemption on intra-group services and group
cost-sharing arrangements
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Further developments ?
Proposed Council Regulation
• Non-exhaustive list of activities falling within the
scope of management of investment schemes
• List substantially covers items included in the VAT
Guidelines but contains additional services, such as
depositary services (in Abbey National plc, the ECJ held
that depositary services do not qualify as fund
management and therefore not exempt)
• List of non-exempt services – ex. external audit of
the fund, marketing and management of fund
overheads, systems and IT development
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Main VAT obligations
• No Maltese VAT charged on exempt services…importance of
identifying exempt services
• VAT registration in the case of taxable services supplied by a
service provider established outside Malta (EU and non-EU) to
the fund manager or in the case of taxable services supplied by
the manager
• Self-Accounting for and Self-charging Maltese VAT on taxable
services received from non-Maltese service providers (ex: legal
services supplied by a UK law firm to a Maltese fund manager)
• Reporting non-exempt services to funds established in other MS
• No input VAT recovery on goods/services attributable to exempt
management services
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