Management of investment giro by MiFID administrator exempt from VAT

22/12/20

On 4 December 2020, the Dutch Supreme Court ruled that an investment giro executed by a trust, offered by a manager who holds a license for individual asset management (the “MiFID license”), qualifies as a special investment fund for VAT purposes. This means that the fee for the management of the investment giro should be exempt from VAT.

Background

The VAT exemption for the management of special investment funds has been a subject of discussion for years. In the case of Fiscale Eenheid X NV bv (C-595/13) the Court of Justice of the European Union (CJEU) added another requirement to the conditions for this exemption to be granted. The CJEU ruled that a fund can only be a special investment fund within the meaning of the exemption if it is subject to special government supervision.

The Dutch State Secretary of Finance has indicated in the Decree of 22 March 2019, no. 2019-42405 on special government supervision, that supervision under the UCITS and AIFM Directives, among other things, can be regarded as special government supervision. However, supervision under the MiFID Directive does not qualify as special government supervision.

The dispute

A manager of an investment giro was of the opinion that the management of the investment giro trust was exempt from VAT. In the case at hand, the Dutch Tax Authorities stated that the fee charged by the manager for the management of the trust is subject to VAT. It was therefore in dispute whether the management of an investment giro trust could fall under the VAT exemption for the management of assets collected for collective investment by a special investment fund.

In order to apply the exemption for the management of special investment funds, the investment giro trust must be regarded as an investment fund with assets collected for collective investment and the manager is subject to special government supervision. The Dutch Tax Authorities stated that both requirements had not been met in the case at hand.

According to them, the collected investments do not qualify as collective investment because the services provided by the manager are individual asset management considering the license at hand. In the view of the Dutch Tax Authorities, the investor giro trust is merely a custodian and administrator of individual assets of investors, and the investors are not on the basis of a participation entitled to a part of the assets of the investment giro trust but only hold a legal claim against the investment trust.

In addition, according to the Dutch Tax Authorities, the investment giro does not qualify as a special investment fund because the supervision under the MiFID Directive, to which the investor giro trust is subject, is not a “special government supervision”.

The judgment of the Dutch Supreme Court

The Dutch Supreme Court ruled that the investment giro executed by the trust can indeed be regarded as a special investment fund. The way in which investors' assets are collected on a central account and the way the financial instruments are held by the investment giro meet the essential characteristics of a special investment fund.

According to the Dutch Supreme Court, a fund can be considered a special investment fund if:

the money to be invested are pooled and diversified in various financial instruments that can be managed effectively in order to optimize results,
such aggregation spreads the risk of these investors, and
each investor has a proportional interest in the investments, but does not own the investments himself.

According to the Dutch Supreme Court, it is not required that the assets of a fund are raised by the issuance of shares or participation certificates. This is because the participants are entitled to the (monetary) value of a proportional part of the fund's assets. Furthermore, it is notable that the Court does not adopt the requirement proposed by the Advocate General that there must be VAT entrepreneurship.

According to the Court, the supervision exercised over the manager on the basis of the MiFID Directive also meets the requirement of special government supervision.

What does this mean to you?

This judgment by the Dutch Supreme Court provides a little more clarity about the application of the exemption for the management of special investment funds.

The judgment clarifies that pooled assets in which participants share the risk proportionally and of which the manager has a MiFID license can be regarded as special investment funds within the meaning of the VAT exemption.

In addition, the Court has clarified that supervision on the basis of the MiFID Directive can be regarded as special government supervision. This also proves that the Dutch State Secretary's Decree on special government supervision with regard to MiFID supervision is incorrect and requires amendment.

The judgment seems to open the way for the idea that, insofar as the management of assets takes place within the broader European supervisory law framework, supervision can be considered to be special government supervision.

We recommend that you contact your regular PwC VAT advisor to determine whether forms of government supervision not yet mentioned in the Dutch State Secretary's Decree qualifies as special government supervision. You can of course also contact the undersigning advisors.