Court of Justice

In the joined cases of K (C-58/20) and DBKAG (C-59/20), the Court returned to the issue of the ambit of the exemption for the management of special investment funds, this time in the context of third party supplies.

In the first case, various investment management companies had outsourced to a third party (K) services for the calculation of the taxable income of unit-holders from the funds. K relied on information supplied to it by the management company to produce income statements to be sent to the tax authority in relation to each of the unit holders in the fund although K had to tailor each statement to take account of the characteristic of each investor. The management company was liable to the tax office for the accuracy of the income statements.

In the second case, an investment management company paid to use software for risk calculation and performance indicators specifically tailored to investment fund activity. The investment management company was required to adapt its own IT environment to enable price and market value data to be passed from it to the specialist third party software. The software licensor also provided various support services such as training for the investment management company staff as well as updates to the software.

The Court was asked to decide if the services in each case fell within the exemption for management of special investment funds.

The Court noted that the purpose of the exemption was to promote access to the securities market for small investors and that that purpose would be undermined if the exemption were only available to services outsourced in their entirety. The Court said that it was necessary to look at whether the service provided by the third party was connected to the investment management company’s activity including its administrative and accounting services. However, services which are not specific to the activity of a special investment fund but inherent in any type of investment would not, according to the Court, fall within the scope of “management”.

The Court referred to Blackrock Investment Management (UK) (C-231/19), to support its view that services provided via IT infrastructure were not automatically excluded from the scope of the exemption.

While the Court concluded that each of the outsourced services was in principle capable of falling within the exemption, it left the national court to assess whether on the facts they were within it by looking at whether:

• the tax-related services supplied by K complied with Austrian tax law requirements specific to special investment funds as opposed to requirements for other funds; and
• the software performed functions intrinsically connected to and exclusively required to manage special investment funds.

DLA Piper comment: The judgment in this case provides valuable detailed guidance in its analysis of what counts as investment management services for the purposes of the exemption, in particular as regards the application of decisions such as SDC, which have been relied on by tax authorities to deny exemption for use of specialist software. Even though the Court held that the decision whether the services provided by the specific companies were exempt from VAT was ultimately a decision to be made by the referring courts, it gave detailed instructions to the referring courts. However, not all tax or software services used by management companies can benefit from VAT exemption. Therefore, an assessment, especially considering the binding nature of the judgment of the ECJ, regarding the possibility of tax or software services used by management companies benefitting from VAT exemption should be undertaken. In the UK, while the case is of only persuasive authority but it may be relevant to the tax authority’s deliberations on the potential reform the UK’s VAT treatment of fund management fees. Also, the decision may be interesting with the view of the UK’s Upper Tribunal that a specialised software platform was a service of management. The CJEU’s decision therefore, is a useful highlight that the understanding of ‘management’ has been too narrow in the past. This will also be relevant given technological developments and how these will be interpreted within the definition of “management”.

In Radio Popular - Electrodomesticos SA (C-695/19), the taxpayer sold computers, phones and domestic appliances. It also earned commission by selling extended warranties for its products on behalf of an insurer. Rádio Popular did not charge VAT on this service but deducts in full the VAT charged on all its activities. According to the Portuguese tax authorities, VAT is only deductible on a pro rata basis. The Portuguese court asks a preliminary question in this case. In other words, the taxpayer did not include the commission in its partial exemption method of calculating its VAT recovery. In its judgment which was not preceded by an Advocate General opinion (suggesting that it was not considered that the case raised a novel question), the Court pointed out that the VAT Directive specifically omits insurance transactions from the definition of financial services that can be left out of partial exemption calculations. Further the Court rejected an argument from the taxpayer that the insurance intermediary services it was providing were incidental financial services (which the VAT Directive says can be left out of account when calculating partial exemption recovery fractions); insurance transactions and financial transactions are distinct concepts and cannot be treated the same way for the purpose of applying a derogation.

DLA Piper comment: In Radio Popular - Electrodomesticos SA, the Court ruled that a transaction that is considered an “insurance transaction” within the meaning of Article 135(1)(a) of the VAT Directive cannot constitute a financial and ancillary transaction within the meaning of Article 174(2)(b) and (c) in conjunction with Article 135(1)(b)(g) of the VAT Directive. In that case, it is not important whether the transaction is also “ancillary” within the meaning of those provisions. It follows that Article 174(2)(b) and (c), in conjunction with Article 135(1) of the VAT Directive, does not apply to the transactions performed by Rádio Popular as an intermediary in the sale of an additional guarantee. It is important in this respect that Rádio Popular's main activity is the sale of household appliances and other computer and telecom products to consumers. The turnover related to these transactions does not have to be excluded from the denominator of the fraction used for the calculation of the deductible proportion pursuant to Article 174(1) VAT Directive. Therefore, the amount of turnover relating to those intermediation transactions lead to non-recoverability of input VAT according to the pro-rata used to calculate the deductible proportion of input VAT.