VAT-exempted management of Dutch special investment funds contested in ECJ
Denis Pouw and Rakesh Gobind of WTS examine Advocate General Juliane Kokott’s Opinion in an ECJ case which could affect the VAT treatment of real estate exploitation for special investment funds.
The Dutch VAT legislation (based on the EU VAT Directive) includes an exemption for the management of special investment funds. Until recently, the widespread opinion was that the special investment funds should only include funds which invest in securities.
The Dutch tax authorities’ policy is that the VAT exemption does not apply to services provided to real estate funds, unless the services are the management of the actual sale and purchase of real estate. Property management and the exploitation of real estate are therefore taxable with VAT. This VAT is, in general, not reclaimable for special investment funds.
One Dutch VAT entrepreneur has disputed the (deemed) exclusivity of the exemption for the management of security funds and took the position that the exemption should also be applicable for the management of real estate funds. Besides, the Dutch VAT entrepreneur maintained that the management of a real estate fund included the following services:
activities as a managing director;
handling activities arising from legal regulations, statutes, regulations and administrative decisions;
managing the exploitation of real property;
financial reporting, data processing and internal audit services;
controlling the assets of the fund, including the sale and purchase of real estate; and
the acquisition of shareholders or certificates holders.
The Dutch Supreme Court decided that the the VAT legislation and current jurisprudence regarding the management of special investment funds is not sufficient to give a decision and therefore requested the European Court of Justice (ECJ) to answer the following two questions:
Can a company with multiple shareholders which solely invests in real estate qualify as a special investment fund?; and
If question one is answered in the affirmative, does the term 'management' also cover the outsourced actual exploitation of a special investment fund's real estate?
After the initial hearing at the ECJ, Advocate General Kokott recently gave her opinion regarding this case. The ECJ will decide at a later stage, but the majority of cases follow the opinion of the Advocate General.
First, the Advocate General investigated what special investment funds actually are, concluding that an investment fund can only qualify as a special investment fund under the EU VAT Directive if the fund is subject to a special government regulatory regime. The Advocate General investigated whether the exemption for special investment funds could also apply to real estate funds and came to a positive conclusion. So the first question of the Dutch Supreme Court is answered in the affirmative. Regarding the second question of the Dutch Supreme Court the Advocate General concluded that the actual exploitation of real estate also qualifies as being part of the management of a special investment fund.
If the ECJ follows the Kokott opinion, the outsourced exploitation of real estate for qualifying funds will not be taxable with VAT. This decision would clearly be profitable for special investment funds which invest in real estate as it will decrease their VAT burden.