K is a service provider to whom investment management companies (IMCs) outsourced certain activities for the determination of taxable figures at the level of unitholders in investment funds managed by the IMC.
While the IMCs retained the position of tax representative which transmitted the declaration to the reporting office, they merely adopted the tax statements and declaration of tax figures as prepared by K without making further changes.
K invoiced its services without VAT, as these tasks were in K’s opinion covered by the VAT exemption applicable to the management of special investment funds.
DBKAG is an IMC that acquired a license for the indefinite right of use of a third party’s software in order to perform computations for the management of risk and performance of qualifying investment funds. To use the software, DBKAG had to adapt its own software and IT systems so that the different tools could interact. In addition, DBKAG acquired, from the same provider, support services such as implementation of the system and training of employees. The software, however, still required significant input from DBKAG, such as the manual incorporation of values into a database, the election of computation methods etc.
DBKAG did not self-assess input VAT on these transactions, as it considered them to be covered by the VAT exemption applicable to the management of special investment funds.
The ECJ’s decision
In its reasoning, the ECJ dives deeper into its long established rule whereby, to benefit from the VAT exemption, the services must, viewed broadly, form a distinct whole that fulfil the specific, essential functions of the management of special investment funds.
With regard to the notion of “distinct whole”, the ECJ relies on the objective pursued by the VAT exemption, and notably considers that it is not necessary for a task to be completely outsourced for it to be a distinct whole.
As for the requirement that services be “specific and essential”, the ECJ refers to an intrinsic link between the services and the management of special investment funds. In addition, the ECJ confirms its decision in the BlackRock case, whereby a service that can be used for the management of special investment funds, but also for other types of investments, should not be covered by the VAT exemption.
Where these conditions are met, services provided by third parties to IMCs, such as the determination of taxable figures at the level of unitholders and the licensing of a software designed to perform computations for the management of risk and performance of a special investment fund can benefit from the VAT exemption.
In our view this is a positive development as the ECJ confirms its views on the application of the VAT exemption and also seems to open the door for application of the VAT exemption in respect of outsourced services such as tax compliance and automation of certain tasks, provided that the criteria set by the ECJ are met. It should be noted however that the ECJ does not explicitly state whether the services in the cases at hand meet these criteria, but instead leaves these questions to the referring national courts. We expect that whether such types of services can benefit from the VAT exemption will have to be assessed on a case-by-case basis.
Please contact your trusted adviser at Loyens & Loeff or get in touch with your dedicated specialists in the Indirect Tax practice group.