Implications of the CJEU’s judgment in Fiscale …

1 10 December 2015 Tax ServicesReal estate funds: VATexemption for fundmanagement servicesImplications of the cjeu s judgmentin Fiscale Eenheid X NVOn 9 December 2015, the Court of Justice of the European Union( cjeu ) released its judgment on the Dutch case of Fiscale Eenheid XNV (C-595/13).The cjeu has broadly agreed with the Advocate General s (AG) opinionthat funds which invest in real estate can be regarded as a specialinvestment fund (SIF) for the purposes of Article 135(1)(g) of thePrincipal VAT Directive. As such, the management of these vehicles canqualify for VAT , in contrast to the AG s opinion, the cjeu found that themeaning of management does not cover property and facilitiesmanagement and is therefore limited to investment recommendationsand portfolio management funds and their managers (and administrators), may wish toconsider the impact of this judgment both looking forward A is part of Fiscale Eenheid X NV , meaning Dutch VATG roup X.

2 It entered into agreements to provide services to three realestate investment companies established in the Netherlands. Theshares in these companies were held by, amongst other investors,pension funds. The real estate companies activities consisted ofbuying, selling and renting real estate assets they the real estate companies had no employees, Company A provided arange of services including:-physically managing the assets of the client, including buyingand selling real estateReal estate funds: VAT exemption for fund management services2-acting as managing director of the companies-carrying out statutory and administrative tasks-carrying out financial reporting, data processing and internal A did not charge any VAT on the fee for its services because it regarded its services as the VATexempt management of issueThe Dutch Supreme Court referred questions to the cjeu .

3 These focused on whether funds investing inproperty could fall to be SIFs for the purpose of the European fund management exemption. The referringcourt also sought clarification of what the term management actually means in relation to application of the VAT exemption for the management of special investment funds has been before theCJEU a number of times, most recently in theATP case which found that defined contribution pensionschemes can qualify as SIFs. However, the Fiscale Eenheid X NV case is the first time the cjeu has had toexpressly consider funds which invest in assets other than securities and other financial cjeu s decisionDoes the VAT exemption apply?The cjeu has determined that a property fund can qualify as a SIF where a number of conditions are include (i)the pooling of investments ( it must have more than one investor (eg a REIT))(ii) thespreading of investment risk and (iii)the fund being subject to specific state supervision ( being regulated).

4 As a result, a property-owing company that is not regulated will not constitute a , in setting out these principles the cjeu reconfirms the criteria that a fund must meet to beconsidered a SIF as per other recent cases includingATP,Wheels andJP Morgan Claverhouse,but does so in acontext that does not specifically relate to funds only investing in property but all funds in court goes on to say that the UCITS Directive established common basic rules for the authorisation andregulation of funds and Member States power to define what is and is not a SIF (as per the EU VAT directive)was overlaid by the coordination, at EU level, of laws relating to the regulation of investment of management Having determined that exemption can apply to the management of a relevant property fund, the cjeu turnedits attention to the precise meaning of management.

5 In contrast to the AG s opinion, the cjeu found that the meaning of management does not cover propertyand facilities management and is therefore limited to functions specific to collective undertakings such asinvestment recommendations and portfolio estate funds: VAT exemption for fund management services3 What is the impact for businesses?There will be a renewed focus on the UK treatment of management services supplied to real estate-owingfunds, including REITs. This process will also be replicated across the EU in key jurisdictions such as Ireland,Luxembourg and the that were not previously considered to be SIFs for VAT purposes will now fall into the exemption,(specifically REITs), and some companies will fall out of the exemption. Determining whether a company nowfalls within the exemption will be entirely fact specific.

6 However, this focus shouldn t necessarily be on whetherthe fund invests in property, but rather whether the three conditions mentioned throughout the ruling aresatisfied.(i)the pooling of investments; and(ii)the spreading of investment risk; and(iii)the fund being subject to specific state supervision ( being regulated).Funds which are not currently covered by the UK exemption should determine whether they bear thesehallmarks of a SIF as set out in Fiscale Eenhied X NV, as well as the other leading precedents includingATP,Wheels and JP Morgan : Where a fund has suffered irrecoverable VAT costs, it may wish to consider submitting claims forpotentially overpaid VAT or requesting that its suppliers do so. In the UK, businesses can submit claims foroverpaid VAT going back a total of 4 years. In addition, following the Court of Appeal s judgment in theITCcase, funds may also wish to consider submitting a civil claim to the High Court for the period from 1990onwards.

7 Any claim underITC principles must be made within 6 years of the relevant error being : As always, exemption is a double-edged sword. Property and asset managers will need to considerthe liability of their services and whether or not they constitute a single supply with one liability or separatesupplies only partly falling within the exemption. This will likely impact their input tax recovery and may requirea change of partial exemption methodology. Managers should also consider the extent to which the onus willbe on them to consider the status of their clients when agreeing anticipate that UK Legislation will be changed. However, until such changes are made, UK taxpayers canrely on existing UK Assurance Tax Transactions AdvisoryAbout EYEY is a global leader in assurance, tax,transaction and advisory services.

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9 2014 EY LLP. Published in the Rights line with EY s commitment to minimise its impact on theenvironment, this document has been printed on paper witha high recycled in this publication is intended to provide only a general outlineof the subjects covered. It should neither be regarded as comprehensivenor sufficient for making decisions, nor should it be used in place ofprofessional advice. EY LLP accepts no responsibility for any loss arisingfrom any action taken or not taken by anyone using this informationWe have a global indirect tax practice which is experienced in providingsupport in relation to technical VAT issues. If you feel that this judgmentcould have Implications for your business, and you would like to discussthe position in more detail, please speak with your usual EY indirect taxcontact or one of the people below:David 7951 2249 Ali 020 7951 5248 Janet 7951 3448 Jack 7951 4340