Arsene Taxand - VAT & indirect taxes

Collective management and VAT: European harmonization in sight?

The Abbey National decision (C-169/04) of May 4, 2006 was much-awaited by players in the asset management sector in Europe. This decision in fact defined, for the first time since the 6th VAT Directive entered into force in 1977, the exact scope of the VAT exemption for collective management provided for under article 13-B-d-6°.

For over 25 years, every State, administration and court has developed its specific interpretation of the scope of this exemption.

Furthermore, the very wording of Article 13-B-d-6 of the Directive differed substantially in the national language of each Member State.
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This decision should therefore be analyzed, together with its effects in France and in the main States where collective management represents a significant burden.

The decision itself

Pursuant to a request for a decision referred to it by the VAT Tribunal of London, the ECJ held that:

1. Member States are not free to determine the activities included in the "management" of undertakings for collective investment as well as to define which undertakings are able to benefit from this exemption;

2. The services invoiced by a depository, custodian or a trustee are liable for VAT and therefore, unlike what Abbey National claims, they may not be deemed to be VAT-exempt services within the meaning of article 13 B-d-6 of the 6th VAT directive,

3. The exemption for the "management of undertakings for collective investment" as provided for in Article 13 B-d-6 of the 6th VAT Directive, applies to the services provided by a third party manager within the scope of the administrative management of the funds

The impacts of the decision in France are twofold.

First from a retrospective standpoint:

Prior to this decision, practitioners already considered that the fact that the treatment applicable to open-ended investment companies was not aligned with that applicable to unincorporated mutual investment funds could not be justified on the basis of the French-language wording of Article 13 B d 6 of the 6th VAT Directive (see, for example, Roland Delfaud and Alain Recoules, l’extension possible du champ des exonérations de tva à la gestion sous mandat et de SICAV (the possible extension of the field of exemptions from VAT to outsourced management and open-ended investment companies), Bulletin Joly Bourse, July 2002).

Harmonization in the legislation, as requested by professional associations, took place in France at the end of 2005, with the new rules applying as from some time in 2006, before the Abbey National decision was adopted; these rules make it possible to extend the exemption from VAT that was already available for unincorporated mutual investment funds to the management of open-ended investment companies.

This harmonization was both logical and desirable for France, and the Abbey National decision served to confirm that Article 13 B d 6 refers to all kinds of undertakings for collective investment, whatever their legal form, and therefore those in both contractual form (mutual investment funds or trusts) or corporate form (open-ended investment companies).

The traditional position adopted by the French tax authorities was therefore untenable for much longer and the authorities accordingly showed considerable foresight with regard to the changes that were set to take place by amending the legal provisions, even before the Abbey National decision was adopted.

In practice, those taxpayers who submitted applications for the refund of wrongly paid VAT before the changes in legislation now have confirmation that they made the right decision.

For the others, this decision reopens the period for lodging such claims; the advisability of taking such action however falls within the context of a more extensive consideration of the issue, including the legal aspects related to this type of litigation (no election by the fund management company, analysis of identification sheets / complete prospectuses, prices inclusive or exclusive of VAT, etc.)

Secondly, from a prospective standpoint:

The Court did not follow the approach proposed by Abbey National regarding the VAT treatment of custody services with regard to the possibility of VAT exemption and confirmed that VAT does apply to custody services, based on the European Legal Code and in particular Annex II to the 1985 Directive.

It is appropriate in this regard to give a brief summary of the VAT treatment applicable in Europe prior to the decision.

VAT Treatment for the depository:
• France: T or EE
Luxembourg: E
Germany: T
UK: E
Italy: T
Spain: E

E: partial or total exemption
T: taxation
EE: exemption with possibility of election

This decision will therefore have a significant impact with regard to custody activities, and it will be important to monitor attentively any changes that may be made in certain States that currently apply a total or partial exemption; in this regard, it should also be noted that, unlike the management activity, the custody activity does not yet benefit from a veritable "European passport" and the risks of relocation to another State, in the light of a more favorable VAT regime, are therefore much more limited.

Alain Recoules