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Raphaël Glohr |
Michel Lambion |
Background
The December 2015 Fiscale Eenheid X NV case involved a Dutch supplier that provided services to three Dutch real estate investment companies held by pension funds, among other investors. These services included portfolio management services (buying, selling and renting real estate), administrative services and "property related" services, including supervising the use of the property, maintaining contact with tenants, inspecting premises, collecting rent and arranging maintenance.
The supplier invoiced all of the services for a single VAT-exclusive fee, assuming the services would qualify as the VAT-exempt management of investment funds. The Dutch VAT authorities challenged this position and, after an appeal to the Dutch Supreme Court and that court decided to refer the case to the CJEU.
The CJEU was asked to decide:
Whether a real estate fund qualifies as an investment fund for VAT purposes; and
Which services qualify for VAT-exempt treatment.
Regarding the first question, the CJEU held that an entity set up by investors to invest in real estate (real estate fund) could be considered an investment fund for VAT purposes because such real estate funds are sufficiently similar to funds investing in shares and securities and, therefore, could be considered direct competitors. The CJEU pointed out that the real estate funds met the investment fund risk-spreading requirement because they invest in different types of immovable property, both residential and commercial, and in different areas. The court also introduced a new criterion – the fund must be subject to "specific state supervision" – but it did not define or provide any detail about the meaning of this term.
Contrary to the Advocate General's opinion in the case, the CJEU held that property-related services cannot qualify for VAT-exempt treatment. According to the court, such services are necessary for any property and consequently do not meet the criteria of being specific to the activity of an investment fund. In line with its previous jurisprudence, the CJEU confirmed that the management of investments and administrative services could benefit from the VAT exemption.
Some wins, some losses
While an exemption is usually considered advantageous, a VAT exemption implies that the service provider will not be able to recover the VAT incurred on its own costs and that it will pass this unrecoverable VAT on to its customers. In this respect, the EU VAT Directive exempts certain transactions from VAT (e.g. the rent, lease or sale of a property), but with an option for member states to impose VAT. This option will be of interest when the tenant is in a position to recover VAT (e.g. where the tenant is a business that is able to recover VAT on its own costs).
The exemption of management services from VAT, therefore, will be beneficial if the investment fund owns property rented without VAT (typically residential property), while it implies an additional cost for investment funds that own property rented with VAT (typically warehouses or offices).
The CJEU decision will benefit some, but not all investment funds, and should be viewed on a case-by-case basis, taking into account that the exemption for investment funds and for real estate transactions are interpreted and applied quite differently across member states.
Raphaël Glohr (rglohr@deloitte.lu) and Michel Lambion (milambion@deloitte.lu)
Deloitte Tax & Consulting
Website: www.deloitte.lu
