Flashback on ECJ Cases – C-275/11 (GfBk) – VAT exemption for advice to management companies of mutual funds

On March 7, 2013, the ECJ issued its decision in the case C-275/11 (GfBk).

Context: Taxation — Value added tax — Directive 77/388/EEC — Exemption of the management of special investment funds — Scope

Article in the EU VAT Directive

Article 13B(d)(6) of the Sixth VAT directive (Article 135(1)(g) of the EU VAT Directive 2006/112/EC.

Article 135
1. Member States shall exempt the following transactions:
(g) the management of special investment funds as defined by Member States;

Facts

GfBk is an undertaking whose objects are the dissemination of information and recommendations relating to the stock market, the provision of advice relating to investment in financial instruments and the marketing of financial investments.
In December 1999 GfBk concluded a contract with an IMC which managed a retail investment fund in the form of a special investment fund under the KAAG. GfBk thereby undertook to advise the IMC ‘in the management of the fund’ and, ‘constantly to monitor the fund and to make recommendations for the purchase or sale of assets’. GfBk also undertook to ‘pay heed to the principle of risk diversification, to statutory investment restrictions … and to investment conditions …’.
It is apparent from the documents before the Court that the parties had agreed that GfBk would be paid for its advice on the basis of a percentage calculated by reference to the average monthly value of the investment fund.
Pursuant to that contract, from 1999 to 2002 GfBk provided the IMC at issue in the main proceedings, by telephone, fax or email, with recommendations concerning the purchase and sale of securities. The IMC entered those recommendations into its purchase and sale order system and, after checking that they did not infringe any statutory investment restriction applicable to special investment funds, implemented them, often within a few minutes of receiving them. Although the IMC made no selection of its own in the management of the investment fund, the final decision and final responsibility continued thereby to lie with it. GfBk was informed of the action taken following its recommendations and received daily statements of the composition of the investment fund for which it provided advice.
In the context of the fiscal procedure relating to turnover tax, GfBk requested that its advisory services to the IMC at issue in the main proceedings be exempted from VAT as outsourced services for the management of a special investment fund. The Finanzamt refused that request, taking the view that the services supplied by GfBk were not covered by the ‘management of special investment funds’ within the meaning of Article 13B(d)(6) of the Sixth Directive and could not therefore warrant such exemption.

Questions

For the purpose of interpreting the term “management of special investment funds” within the meaning of Article 13B(d)(6) of [the Sixth Directive], is the service provided by the third-party manager of a special investment fund sufficiently specific and hence exempt from [VAT] only if:

(a) the manager performs a management function and not only an advisory function, or if

(b) the service differs in nature from other services by reason of a characteristic feature for the purpose of exemption from [VAT] under this provision, or if

AG Opinion

Article 13B(d)(6) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment must be interpreted as meaning that an advisory and information service provided by a third party, relating to the management of a special investment fund and the purchase and sale of assets, constitutes an activity of ‘management’ specific and distinct in nature, provided that the service is found to be autonomous and continuous in respect of the activities actually performed by the recipient of the service, a matter which it is for the national court to verify.

The proposed interpretation of Article 13B(d)(6) of Directive 77/388 is not affected if a requirement of horizontal fiscal neutrality is taken into account.

Article 13B(d)(6) of Directive 77/388 must be interpreted as meaning that, in so far as the term ‘management’ includes services that do not entail the alteration of legal positions, the fact that there is no authorisation allowing for the delegation to GfBk does not place conditions on the application of the exemption in that article.

Decision

Article 13B(d)(6) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment must be interpreted as meaning that advisory services concerning investment in transferable securities, provided by a third party to an investment management company which is the manager of a special investment fund, fall within the concept of ‘management of special investment funds’ for the purposes of the exemption laid down in that provision, even if the third party has not acted on the basis of a mandate within the meaning of Article 5g of Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as amended by Directive 2001/107/EC of the European Parliament and of the Council of 21 January 2002.

Summary

Scope of exemption for management of mutual funds

Investment advisory services performed by a third party on behalf of a management company of a mutual fund are covered by the notion of ‘management of a mutual fund’ for the purposes of the exemption, even if the third party has not acted on the basis of a mandate, as referred to in Article 5g of Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), as amended by Directive 2001/107/EC of the European Parliament and the Council of 21 January 2002.

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