Software and administrative services provided to SIFs: VAT exemption

The CJEU has held that the provision of software and administrative services, such as tax calculations, to managers of special investment funds (SIFs) is capable of falling within the exemption for the management of SIFs: K v Finanzamt Osterreich (Case C-58/20) and DBKAG v Finanzamt Osterreich (Case C-59/20).

In particular, the CJEU has emphasised that it is not necessary for the whole of a service to be outsourced in order for it to fall within the exemption. Provided that the service is specific to and essential for the management of SIFs (rather than more generally) then it may qualify for exemption even if it only involves a partial outsourcing of a function. The decision also highlights that the provision of software may well fall within the scope of the exemption, again providing that it meets these broader requirements.

Background

In the first of the joined cases, a number of investment management companies (IMCs) outsourced to K certain services for the calculation of the taxable income of unit-holders in funds under management. These tax calculations were required to be made by the IMCs, who remained responsible for the reports. However, they simply relied on the reports prepared by K. K in turn produced the tax statements from information provided to it by the IMCs of the income at the level of the funds. K invoiced the IMCs for its services without charging VAT on the basis that its services fell within the exemption for the management of SIFs (Article 135(1)(g) of the Principal VAT Directive).

In the second case, DBKAG, an investment manager of SIFs, was granted a right to use software which was essential to risk management and performance measurements by SC (a German entity). The software was specifically tailored to the activity of investment funds and to the legislative requirements applying to them. The software was used in conjunction with other software used by DBKAG, providing price and market value data. SC also provided support services, such as the training of DBKAG staff in the tasks involved in configuring the software and entering data necessary for its operation. The risk and performance indicators provided by the SC software was used in turn to draw up reports in order to comply with legal obligations to provide information to the authorities and investors. DBKAG did not account for VAT under the reverse charge on the receipt of the services from SC on the basis that the supplies fell within the exemption for the management of SIFs.

The Austrian tax authorities contended that the VAT exemption for management of SIFs did not extend to either of these scenarios. In both cases, they argued that the services provided were not specific and essential for the management of SIFs and, in addition, that the services were not sufficiently autonomous to fall within the exemption.

Decision of the CJEU

Distinct whole

The CJEU noted that for the purposes of the exemption in Article 135(1)(g) it was necessary to assess whether the services, viewed broadly, formed a “distinct whole”. However, this condition for the service to be distinct in character should not be interpreted as meaning that a service which is “specific to and essential for” the management of SIFs must be outsourced in its entirety. (It should be noted that the English translation in paragraph 36 of the decision, which suggests the opposite, appears to be incorrect.)

In particular, the CJEU noted that the purpose of the exemption was to ensure that smaller investors using the services of IMCs are not treated less favourably than larger investors who invest directly. If the exemption were to be interpreted as not applying unless the whole of a service were outsourced, then it would favour management companies which themselves supply that service and investors who place their money directly in securities and who do not use investment management services. In addition, the CJEU noted that it had already held that advisory services involving recommendations for sale and purchase to IMCs could fall within the exemption even though it was for the IMCs to implement those recommendations after verifying that those recommendations did not infringe any restrictions: GfBK (Case C275/11).

Accordingly, provided that the services in these joined cases were specific and essential to the management of SIFs, then the fact that it remained the responsibility of the IMCs to draw up standardised tax declarations and report them or that the SC software required the input of data by the IMCs did not prevent those services falling within the exemption.

Specific and essential

The Court noted that tasks relating to the administration of SIFs come within the scope of the exemption, including those set out in Annex II to the UCITS Directive. That Annex includes administrative functions such as legal and fund management accounting services and valuation and pricing (including tax returns). Equally, however, the Court emphasised that the Annex II list is not exhaustive and the fact that services are not listed in there does not necessarily mean that they cannot fall within the exemption.

In order to determine whether specific services fall within the exemption, the CJEU noted that “it is necessary to examine whether the service provided by the third party is intrinsically connected to the activity characteristic of a management company, so that it has the effect of performing the specific and essential functions of management of a special investment fund”. By contrast, services which are inherent in any type of investment do not fall within the scope of the exemption.

The Court noted that therefore that in relation to Case C-58/20, it would be necessary for the domestic court to examine whether the tax related services performed by K comply with the obligations laid down in Austrian law which are specific to SIFs (as opposed to other investment funds).

In relation to Case C59/20, the Court noted that the referring court had already indicated that the risk management and performance measurement services are activities specific to the management of SIFs and that the software calculations are an essential basis for DBKAG to fulfil legal obligations. Accordingly, it was clear that the software may be regarded as essential for the management of SIFs.

Comment

The decision of the CJEU is important in highlighting that it is not necessary that the whole of a service must be outsourced for it to fall within the exemption. The fact that the service performs part of a necessary function which is specific to and essential for the management of SIFs may be sufficient for the VAT exemption to apply.

It also highlights that the provision of management software may also fall within the exemption. Again, however, it will be necessary that the software is specific to and essential for the management of SIFs. If it is provide more generally or is used for both SIFs and non-SIFs, then the exemption may not be available.

Although the decision is not binding in the UK post-Brexit, it will remain highly persuasive of the correct application of the exemption. As such, businesses providing services to IMCs and IMCs themselves should consider if any services that they provide or receive may be capable of benefiting from exemption following this decision.