On May 20, 2015 the Advocate General (“AG”) at the Court of Justice of the European Union (“CJEU”) issued her Opinion in the Dutch VAT group X case (C-595/13). This case concerns the interpretation of the VAT exemption for the management of special investment funds. Advocate General Kokott advises the CJEU to qualify a real estate investment fund as a ‘special investment fund’, as long as this fund is under special regulatory supervision. Furthermore, she believes that the actual property management also falls under the concept of ‘management’.

The case

The taxpayer concluded management agreements with three companies that invest in real estate (“real estate investment funds”). The investors in the real estate companies are institutional investors. The taxpayer’s activities consist of the administration and management of the companies, attracting investors, sales and purchases of real estate (fund and asset management) and the exploitation of the real estate (property management).

Pursuant to VAT legislation, the management of special investment funds is exempt from VAT. The Supreme Court requested a preliminary ruling from the CJEU on whether investment companies that invest in real estate qualify as a special investment fund. The Supreme Court also wanted to know whether the actual property management is covered by the term ‘management’ within the meaning of the abovementioned exemption.

AG’s Opinion

According to the AG, to answer the question whether theinvestment fund qualifies as a special investment fund, it is necessary to examine whether the investment fund is subject to special regulatory supervision. In the opinion of the AG, regulated investment funds may qualify as special investment funds, provided this meets the objective of the VAT exemption. The exemption must guarantee equal VAT treatment for direct investment and investment through an investment fund. In this respect, she compares the investor that invests for its own account (and thus does not pay VAT for the management thereof) and the investor that invests through an investment fund (and therefore requires a manager). The AG notes here that the question whether the purchase and sale of the investment objects of an investment fund is exempt or subject to VAT is irrelevant for this comparison. The AG also believes that investors face the requisite spread of risk, even if a real estate investment fund by definition only invests in property.

Since the European AIFM Directive did not yet exist at the time of the present case, the AG is of the opinion that the national court must determine whether the real estate investment fund was under national regulatory supervision at that time.

As to whether the actual property management falls under the concept of ‘management’ within the meaning of the exemption, the AG notes that any transactions must be specific to the activity of the special investment fund. According to the AG, the determination of what is ‘specific’ depends upon the investment object. Everything that a manager must do to maintain the investments and derive income from them is specific. In the case of real estate, it also includes the actual property management.

Practical consequences

There are several reasons why this case is relevant to the current (real estate) investment fund practice. It is important to note that under current Dutch practice, investment funds that are comparable with regulated funds also qualify as ‘special investment funds’. If the CJEU follows the AG, it will be important for the application of the VAT exemption whether an investment fund is covered by national or European regulatory rules (which she also believes include regulatory rules in respect of institutions for occupational retirement provisions). With the implementation of the AIFM Directive on July 22, 2013 (with a transitional period of one year), many investment funds became subject to regulatory supervision. However, there are also investment funds that (by virtue of an exemption) are not covered by national or European regulatory rules. Before the implementation of the AIFM Directive, more institutional investment funds were not subject to supervision (by virtue of an exemption), so the VAT exemption for the management of these funds could in theory be no longer applicable. We however consider it unlikely that such a change to Dutch policy would have retroactive effect, because it is difficult to reconcile this with general principles of sound administration. Such a policy change can however not be ruled out for the future.

If the CJEU follows the AG that the interpretation of the term ‘management’ depends upon the investment objects and includes everything a manager must do to maintain the investments and derive income from them, then not only actual property management, but also other activities for other types of investment funds, will fall under the exemption. For (real estate) investment funds with a full or partial entitlement to recover input tax, a broad interpretation of the exemption may lead to cumulation of VAT. This is the case if the manager recharges externally purchased taxable services as part of its exempted management services. This cumulation could be avoided if these VAT taxable services are purchased directly by the (real estate) investment funds.

If the CJEU follows the AG’s opinion, this can provide a basis for exempting from VAT those services that are currently treated as being subject to VAT. To ensure that you do not wrongly pay (reverse charged) VAT, we recommend preserving your rights by filing a notice of objection against (the remittance of VAT on) the Dutch VAT return. If you receive services from Dutch-resident service providers, we advise making arrangements with them as to how any VAT that may have wrongly been charged can be refunded.

The tax advisors of Meijburg & Co’s Indirect Tax Financial Services Group would be pleased to help you identify any potential consequences of this procedure. Feel free to contact one of them or your regular contact for more information.

Click here to download the memorandum in pdf format