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Flashback on ECJ Cases – C-363/05 (JP Morgan Fleming Claverhouse Investment Trust) – The term ‘mutual investment funds’ may include closed-end investment funds such as investment trust companies.

On June 28, 2007, the ECJ issued its decision in the case C-363/05 (JP Morgan Fleming Claverhouse Investment Trust and The Association of Investment Trust Companies).

Context: Sixth VAT Directive – Article 13B(d)(6) – Exemption – Special investment funds – Meaning – Definition by the Member States – Discretion – Limits – Closed-ended funds


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

  •  Claverhouse is an ITC which used the management services of a third party, JP Morgan Fleming Asset Management (UK) Limited, to manage its investment portfolios.
  • Claverhouse is subject to VAT on the management services which it receives, since the Commissioners refuse to treat the supply of management services to an ITC as a service which is exempt from VAT. Thus, over a period of 10 years ending on 31 December 2003, Claverhouse paid GBP 2.7 million in non-recoverable VAT.
  • Against that background, Claverhouse and the Association of Investment Trust Companies, an association representing a number of ITCs operating within the United Kingdom market, lodged an appeal against the Commissioners before the referring court.
  • According to the order for reference, AUTs, which are constituted under trust law, and OEICs, which are constituted under statute, are collective special investment funds in which the respective number of units or shares held by investors varies in accordance with their investment. AUTs and OEICs are variable capital funds (or open-ended funds) which are obliged to buy back their units or shares from investors who wish to sell them. ITCs, which are constituted under statute, on the other hand, are fixed-capital funds (or closed-ended funds). ITCs are collective investment schemes constituted as limited liability companies quoted on the stock exchange. An investor who wishes to realise his investment in this type of fund generally sells his shares on a secondary market such as a stock exchange where the price is negotiated on the basis of supply and demand on the market.
  • The referring court explains that, unlike AUTs and OEICs, ITCs are not subject to authorisation by the Financial Services Authority under the Financial Services and Markets Act 2000. However, like listed companies, they are regulated by the Financial Services Authority in its capacity as Listing Authority.
  • The referring court points out, further, that the management of AUTs and OEICs must be entrusted to an external manager, while ITCs have a Board of Directors which is empowered to manage investments. However, 90% of ITCs entrust the management of investments to external fund managers.
  • Finally, according to the order for reference, in the United Kingdom, an OEIC, which has variable capital and which constitutes a collective investment undertaking within the meaning of the UCITS Directive and which is required to entrust the management of its funds to a third party, is exempt from VAT on the services supplied by its external manager, whereas closed-ended investment companies such as ITCs enjoy no such exemption.

Questions

Are the words “special investment funds” in Article 13B(d)(6) of the Sixth Directive1 capable of including closed-ended investment funds, such as ITCs?
If the answer to the first question is in the affirmative, does the phrase “as defined by Member States” in Article 13B(d)(6):
a.    allow Member States to select certain of the “special investment funds” within their jurisdiction to benefit from the exemption of the supply of management services and exclude others from the exemption, or
b.    does it mean that the Member States are to identify those funds
within their jurisdiction which fall within the definition of “special investment funds” and that the benefit of exemption should extend to all such funds?
3.    If the answer to the second question is that Member States can select which “special investment funds” benefit from the exemption, how do

the principles of fiscal neutrality, equal treatment and the prevention of distortion of competition affect the exercise of that discretion?

4.    Does Article 13B(d)(6) have direct effect?


AG Opinion

(1)      The words ‘special investment funds’ in 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 are capable of including closed‑ended investment funds, such as investment trust companies.

(2)      Article 13B(d)(6) of the Sixth Directive confers on Member States the power to determine the special investment funds whose management is exempt from VAT. In exercising that power, Member States must have regard to the wording and objectives of the provision and to the principle of fiscal neutrality which requires all similar and therefore competing special investment funds to be treated equally as regards the levying of VAT.

(3)      Article 13B(d)(6) of the Sixth Directive has direct effect in favour of those who, under national law, in breach of the principle of fiscal neutrality, do not enjoy the exemption from VAT laid down in that provision.


Decision

1. 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 the words ‘special investment funds’ in that provision are capable of including closed-ended investment funds, such as Investment Trust Companies.

2. Article 13B(d)(6) of Sixth Directive 77/388 must be interpreted as meaning that it allows Member States a discretion in defining the funds located on their territory which are covered by the notion of ‘special investment funds’ for the purposes of the exemption provided for by that provision. However, in the exercise of that power, the Member States must respect the objective pursued by that provision, which is to facilitate investment in securities for investors through investment undertakings, while guaranteeing the principle of fiscal neutrality from the point of view of the levying of VAT on the management of special investment funds which are in competition with other special investment funds such as funds falling within the scope 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 2005/1/EC of the European Parliament and of the Council of 9 March 2005.

3. Article 13B(d)(6) of Sixth Directive 77/388 has direct effect, in that it can be relied on by a taxable person before a national court in order to challenge the application of national legislation alleged to be incompatible with that provision.


Summary

Concept of mutual funds – Definition by Member States – Discretionary – Limits – Closed-end funds

The term ‘mutual investment funds’ may include closed-end investment funds such as investment trust companies.

Member States have discretion in defining the funds within their jurisdiction that fall within the concept of ‘mutual investment funds’ for the purposes of the exemption. However, in exercising that freedom, the Member States must respect the objective pursued by that provision, which is to facilitate investors to invest in securities through collective investment schemes, while at the same time respecting the principle of fiscal neutrality from the point of view of levying VAT on the management of mutual funds that compete with other mutual funds, such as funds falling within the scope of Directive 85/611/EECof the Council of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to certain undertakings for collective investment in transferable securities (UCITS).

Article 13B(d)(6) of the Sixth Directive  has direct effect in the sense that a taxable person may rely on it directly before a national court to oppose the application of national legislation which would be incompatible with this provision.


Source:


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