Tax and IT services for investment funds – exempted from VAT?

Under the VAT Directive, services related to the management of collective investment funds may be exempted. Previous case law implied that services provided by a third party may be exempt from VAT if they form a distinct whole, fulfilling the specific and essential functions for the management of those collective investment funds.

In the first case, an Austrian investment management company purchased tax advisory services from subcontractors in the form of statements of taxable income and tax paid for unit holders; the tax advisor used data provided by the management company. The second case involved the purchase of a software solution that calculated risk and performance indicators of a fund, based on the investment company's data.

For both cases, the CJEU further specified that the distinct character condition cannot be interpreted as meaning the outsourcing of the service in its entirety. Although, according to the CJEU's case law so far, exemptions should be interpreted restrictively, in this case, the CJEU rather surprisingly noted that it is important to bear in mind the very purpose of the VAT exemption: to promote the access of small investors to the securities market. The joint management of investments within collective investment funds affords them the possibility of holding, despite a modest investment, a diversified portfolio that protects them against the risks associated with fluctuations of the value of securities and allows them to share the costs of expert management. In the absence of this exemption, unit holders in collective investment undertakings would be taxed more heavily than larger investors who directly invest their funds in securities and do not use fund management services. If a service that is specific to and essential for the management of a collective investment funds were subject to VAT simply because it is not outsourced in its entirety, that would favour management companies which provide that service themselves.

The CJEU concluded that services inherently related to the management of collective investment funds and provided exclusively for the management of such funds may be exempted even if the investment company purchases them from third parties. However, the court did not decide unequivocally whether the specific tax and IT services referred to in the cases in question could be exempted. The final assessment will be up to the national courts which will primarily have to deal with the fulfilment of the second condition: the service’s specificity to and essentiality for collective investment funds. As for tax advisory services, it will be necessary to verify whether the outsourced tax services correspond to the obligations specific to collective investment funds. As for software solutions, the CJEU indicated that the specificity condition might be met, as software was used to make the calculations necessary for the fund’s risk management and performance measurement required by Austrian laws.