ECJ ON VAT EXEMPTION FOR FUND MANAGEMENT SERVICES IN CASE OF OUTSOURCING

Overview

In two related cases (C-58/20 K and C-59/20 DBKAG), the European Court of Justice (“ECJ”) recently ruled on questions submitted by the Austrian Tax Appeals Court (“BFG”) concerning the VAT exemption for outsourced services in connection with the management of investment funds. The decision of the ECJ on 17 June2021 dealt with the requirements relevant for the application of the VAT exemption for the management of special investment funds. Even if the ECJ did not finally decide on the specific facts, the Court was open to the application of the exemption – repeating known criteria from previous decisions.

Facts

In Case C 58/20 "K", management companies outsourced to a third party ("K") services for the calculation of the taxable income of unitholders from the funds. Based on the audited fund accounting, K determined the figures accordingly for various groups of investors. The management companies were still responsible for carrying out the standardized declarations to the reporting office.

In Case C 59/20 "DBKAG", the third party granted the management company a right to use software which was essential to risk management and performance measurement in return for the payment of a fee. The third-party software processed the data entered by the management company's own IT environment. The responsibility for the accuracy of the automated calculations of risk and performance figures based on this data, which were used by the management company to fulfill its legal reporting obligations, was borne by the third party.

Legal Assessment

The management of special investment funds defined as such by the member states is exempt from VAT. The Directive does not restrict the exemption neither regarding the person providing the service nor regarding the recipient of the service. What is essential is the concept of "special investment funds" defined by the member states as well as the definition of "management". In analogy to the Directive, the Austrian Value Added Tax Act does not define the management service in more detail.

For the final answer to the question whether the outsourced services at hand meet the requirements of the VAT Directive, the ECJ refers to the examination by the national courts. However, the tax exemption will (only) be granted if the services provided by third parties "are intrinsically connected to managing special investment funds" and are "provided exclusively for the purposes of managing special investment funds". For this purpose, the ECJ formulates the standard of review in repetition of decisions already rendered as follows:

• Management services provided by third parties (and outsourced by the management company) may in principle be tax-exempt.
• The prerequisite is that these "viewed broadly, form a distinct whole" fulfill in effect "the specific, essential functions" of the management of special investment funds.
• "Distinct character" does not require the complete outsourcing of the qualified service: According to the ECJ in Case "K", the fact that the declaration to the reporting office resulting from the calculation of the third party is the responsibility of the management company (which outsources the calculation) is not in itself decisive for the assessment of the outsourced service. Similarly, in Case "DBKAG", the necessity of the usage of the software provided by the third party in conjunction with the technical infrastructure (and the resulting database) of the management company is not in itself decisive for the assessment of the outsourced service.
• "Specific and essential character" requires examining whether the service provided by that third party is intrinsically connected to the activity characteristic of a management company: In Case "K", it would have to be examined whether the tax work for special investment funds constitutes specific – and precisely not also inherent in any other type of investment – obligations under Austrian law; the fact that a service is not explicitly mentioned in Annex II to the UCITS Directive (Undertakings for Collective Investment in Transferable Securities Directive) would therefore be irrelevant. In Case "DBKAG", it would also have to be examined whether the service is provided exclusively for the purposes of managing special investment funds, and not to other funds; the mere fact that a service is performed by electronic means does not in itself preclude the application of the exemption to that service insofar as the service in itself is not of a purely material or technical nature.
  
  

Conclusion

The ECJ emphasizes the need for a narrow interpretation of the tax exemption but is open to its application even in the case of outsourcing to third parties. However, the ECJ leaves the final assessment to the local courts.

The Court focuses on the concepts of "distinct/autonomous character" and "specific/essential character" of the service under outsourcing. A partial outsourcing or the purely electronic performance of a service does not prevent the exemption. Specific/essential character within the meaning of the provision requires a close connection to the legally binding duties of the management company. In this context, the ECJ basically refers to Annex II of the UCITS Directive and thus, on the one hand, to the functions of investment management, which also include risk management and performance measurement. On the other hand, this also concerns the “administrative services” mentioned therein, whereby the lack of mention of a specific type of administrative service in the cited catalogue is not in itself a reason for exclusion.