Recent VAT developments affecting fund management services Damien Fiott

www.fff-legal.com

Background Directive 2006/112 and the VAT Act • Directive 2006/112/EC [Art.135(1)(g)] contains a mandatory VAT exemption in respect of the management of special investment funds as defined by Member States • Corresponding provision in the Maltese VAT Act Schedule – Part 2 - Exempt without credit supplies]

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The supply of services consisting of the management of any investment scheme provided that these services are limited to those activities that are specific to and essential for the core activity of the scheme….

Relevance of VAT to fund managers Fund management services are generally exempt from VAT...So what are the issues ? “The VAT is a paradox…a tax in which those who believe themselves exempt are taxed, and those who believe themselves taxed, are generally exempt…” [Reuegebrink J., Omzetbelasting, FED Deventer, 1995]

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Relevance of VAT to fund managers • Managers do not charge VAT on management services • Identifying exempt services • Managers do no recover input VAT (attributable to management services) • VAT element is ultimately borne by the fund / investors (‘cascading’ effect) • treatment of outsourced management services ? • Implications of non-exempt services ?

Relevance of VAT to fund managers • Exemption was subject to different interpretations by MS [partly due to MS’ discretion - the management of special investment funds as defined by Member States] • Interpretation as to what constitutes ‘management’ and as to which types of funds fall within the scope of the exemption • Mismatch in interpretations can result in double VAT charge or no taxation at all • Exposure to tax and administrative action where VAT is not properly accounted for 5

ECJ contributions Banque Bruxelles Lambert (BBL) C-08/03 (2004) • a fund is a ‘taxable person’ for VAT purposes. From a fund manager’s perspective, this is relevant in the context of non-exempt services supplied to funds established in other MS (B2B supplies) Abbey National plc (C169/04) (2006) • management is not limited to investment/portfolio management but includes certain administrative services • services performed by a 3rd party in respect of the administrative management of the funds (as long as such services form a distinct whole and are specific to and essential for the management of those funds) 6

ECJ contributions JP Morgan Fleming Claverhouse Investment Trust plc (C-363/05) (2007) • Management services to UK investment trust companies (close-ended) is exempt • Relevance – equal treatment of different types of funds (exemption should apply to all types of funds)

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Recent Developments 2010 Place of supply rules • Change in place of supply of services • B2B - country where customer is established [BBL (C08/03)] • Obligation to register for VAT –
where fund manager buys in taxable services from a non-Maltese service provider
supply of taxable services by fund manager • Self-charging Maltese VAT on taxable services supplied from non-Maltese service providers (ex: legal services supplied by a UK law firm to a Maltese fund manager) • Obligation to report non-exempt services to funds established in other MS 8

Recent Developments LN425, 2010 Prior to LN 425, the exemption was limited to the management of any investment scheme by a person duly licensed or recognized under the Investment Services Act Scope of amendment • Clarification of meaning of investment scheme ‘collective investment scheme’ as defined in the ISA and a ‘retirement scheme’ as defined in the Special Funds (Regulation) Act • Exemption applies irrespective of whether the fund manager/service provider is licenced/recognised under the ISA 9

Recent Developments 2010 VAT Guidelines • Purpose - to define ‘management’ for the purposes of the VAT exemption • Guidelines confirm that the exemption applies to management as well as administration of investment schemes • Non-exhaustive list of activities which are regarded as falling within the scope of the exemption 10

Recent Developments 2010 VAT Guidelines Definition of management services • Core Management plus • Investment selection • Ancillary fund administration functions • Custodian services supplied to the fund …to the extent that these are limited to activities that are specific to and essential for the core activity of the scheme/fund 11

Recent Developments 2010 VAT Guidelines Non-exhaustive list of qualifying services • NAV calculation • Reconciliation • Investment Portfolio pricing • Fund Accounting • Performance Reporting • Compliance Reporting • Market Research Exemption also applies to outsourced services (Abbey National plc)

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Recent Developments 2010 VAT Guidelines Non-Exempt services Services that are not considered to be specific to and essential for the core activity – typically, consisting in services for the direct needs of the fund manager or administrator. Examples • Accounting services supplied to Fund manager • Payroll and back office services • Serviced office space, Facilities management and similar services • Legal consultancy or advisory services supplied to the fund manager 13

Further developments ? • Proposed amendments to the VAT Directive and proposed new Council Regulation [COM(2007)746] to implement certain measures relating to financial services (including fund management) • Purpose – to secure a uniform application of the VAT exemption, achieve legal certainty and reduce administrative burdens for operators • Measures include the harmonisation of the concept of fund management services 14

Further developments ? Proposed amendments to the Directive • Rewording of exemption - management of investment funds [current exemption refers to management of special investment funds as defined by Member States ] • ‘investment funds’ - undertakings for collective investment in VAT exempted financial instruments and real estate funds; • ‘management’ - activities aimed at realising the investment objectives of the fund 15

Further developments ? Proposed amendments to the Directive

• Introduction of an option for fund managers to charge VAT (input Vat recovery) • VAT Exemption on intra-group services and group cost-sharing arrangements

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Further developments ? Proposed Council Regulation • Non-exhaustive list of activities falling within the scope of management of investment schemes • List substantially covers items included in the VAT Guidelines but contains additional services, such as depositary services (in Abbey National plc, the ECJ held that depositary services do not qualify as fund management and therefore not exempt)

• List of non-exempt services – ex. external audit of the fund, marketing and management of fund overheads, systems and IT development 17

Main VAT obligations • No Maltese VAT charged on exempt services…importance of identifying exempt services • VAT registration in the case of taxable services supplied by a service provider established outside Malta (EU and non-EU) to the fund manager or in the case of taxable services supplied by the manager • Self-Accounting for and Self-charging Maltese VAT on taxable services received from non-Maltese service providers (ex: legal services supplied by a UK law firm to a Maltese fund manager) • Reporting non-exempt services to funds established in other MS • No input VAT recovery on goods/services attributable to exempt management services 18