On 3 June 2011 a German court has referred a case to the European Court of Justice (“ECJ”) concerning the VAT treatment of investment advisory services. In particular, the referring court would like to understand whether, and if so to what extent, investment advisory services can benefit from the VAT exemption for fund management services.

The case
The case at hand concerns a German collective investment fund, managed by a German management company. This management company has engaged a (German) third party to render investment advisory services to it in relation to the fund. The facts of the case show that these activities involve recommendations for acquisition and/or transfer of assets. It was explicitly noted by the referring court that the management company has the authority to accept or decline any advice or recommendation given by the investment advisor. In practice, in many cases such recommendations and advice were accepted by the management company within minutes. The referring court would like to know whether the investment advisory services rendered to the fund manager are exempt from VAT.

Legal reference
The current case refers to the Abbey National II-judgement (2006), in which the ECJ ruled that the exemption does not preclude the management of investment funds being broken down into a number of separate services. In case such a separate service is provided by a third party, it can also benefit from the exemption. For such treatment it is, however, required that these separate services if ‘viewed broadly, form a distinct whole, and are specific to and essential for the management of special investment funds’.

Our advice
The Abbey National II-judgement provides support for the viewpoint that the exemption should also apply to investment advisory services, as these are indeed specific to and essential for the management of investment funds. Notwithstanding the fact that this case has been referred to the ECJ by the German court, we feel that for the time being ample and strong arguments for exempting investment advisory services continue to be present. This matter is now to be explicitly assessed by the ECJ. While the case at hand is still at a very early stage, it may ultimately affect Dutch investment funds and its management companies. In general, many investments funds and their management companies are not entitled to a (full) recovery of input VAT. For this reason, should the ECJ limit or deny in full the application of the exemption to investment advisory services, this could increase VAT costs for investment funds and/or its management companies receiving investment advisory services.

A final judgement by the ECJ is not expected before mid 2012. Of course we will keep you posted in respect to any relevant development.

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