Austria: The right to use software can qualify as VAT-exempt asset management (CJEU judgment)
Scope of the term “management” within the meaning of the exemption available for the management of special investment funds
Court of Justice of the European Union (CJEU) judgment
The Court of Justice of the European Union (CJEU) issued a judgment on the scope of the term “management” within the meaning of the exemption available for the management of special investment funds.
According to the CJEU, both the right to use software and specific administrative services can qualify as a management service that is exempt from value added tax (VAT). Thus, the CJEU’s judgment is relevant for parties that provide specific administrative services to asset managers, as well as asset managers that purchase such services from abroad.
The joined cases are: K (no. C‑58/20, 17 June 2021) and DBKAG (no. C‑59/20, 17 June 2021). Read the CJEU’s judgment
These (joined) cases concern whether the VAT exemption for the management of special investment funds can be applied to services provided to managers of such funds.
- The first case concerns certain services for the calculation of the taxable income of unit-holders of an investment fund so that that this income is subject to income tax in accordance with national law.
- The second case concerns the granting of a right to use software that is used exclusively for calculations essential for the risk management and performance measurement of an investment fund. The software is specifically tailored to investment funds.
For the exemption for the management of special investment funds to apply, the service must qualify as “management” and this management must relate to a “special investment fund.” In these cases, the question is only whether the services qualify as “management.” The referring Austrian court had doubts about the interpretation of the concept of “management,” and whether the service could fall within its scope.
“Management” within the meaning of the exemption
The term “management” is not defined in the VAT Directive, but the definition can be derived from the case law of the CJEU that the exemption for the management of special investment funds applies to outsourced acts of management when such acts:
- Viewed broadly form a distinct whole
- Fulfill the specific and essential functions of the management of special investment funds
In principle, this is the case if the task in question is listed in Annex II of the European Directive on undertakings for collective investment (UCITS Directive). The annex describes a number of activities relating to the management of a UCITS, including administration and reporting. Moreover, the exemption for the management of special investment funds is not limited to the tasks referred to in Annex II of the UCITS Directive. Other services may also qualify as management to the extent that they are intrinsically related to the services performed by a fund’s asset manager.
The CJEU found that the services in the cases before it may fall under the exemption for the management of special investment funds. According to the CJEU, it is not necessary for specific services to be outsourced in their entirety.
Overall form a distinct whole
The CJEU first addressed the condition that the outsourced services must, viewed broadly, form a distinct whole. In both cases, certain functions were outsourced to a third party, but some of the responsibilities remained with the fund manager. In addition, the outsourcing did not release the fund manager from its legal obligations. Given the objective of the exemption, the CJEU ruled that there is no requirement for a particular task be outsourced in its entirety. If this were the case, it would mean that the VAT exemption is only open to specific tasks that are outsourced in their entirety, which, according to the CJEU, limits the practical scope too much.
Specific and essential
The CJEU addressed the requirement that the outsourced service must be specific and essential to the activities of a fund manager. As mentioned above, the typical tasks of a manager listed in Annex II of the UCITS Directive are in principle eligible for the exemption, insofar as these are specific and essential.
According to the CJEU, outsourced administrative services fulfilling a tax task can be regarded as VAT-exempt management insofar as they are specific and essential to fund management. It is up to the referring court to determine whether this condition is met.
The software license that allows calculations to be performed for risk management and performance measurement may also fall under the exemption for the management of special investment funds. The CJEU reiterated that mere material or technical services are not covered by the exemption for the management of special investment funds, but emphasized that not every service performed by means of software qualifies as such. The decisive factor is what the service actually consists of.
It follows from the CJEU’s judgment that services used only by managers of investment funds are, as a starting point, specific and essential to fund management because it can be assumed that such services are specifically tailored to the management of investment funds. In practice, it is sometimes suggested that a service provided in similar form to both investment funds and others may be too generic in nature to qualify for fund management exemption. The fact that services could theoretically be provided to parties other than special investment funds is not, in the view of tax professionals, decisive. For example, services such as portfolio management and investment advice can by their very nature be provided to parties other than investment funds. Tax professionals believe that the CJEU applied this test primarily to exclude mere material or technical services, as well as more generic services, from the application of the exemption for the management of special investment funds. Outsourced services are not specific and essential if a single service is actually used by a fund manager to manage both special investment funds and other funds. It is not possible to partially apply the exemption for the management of special investment funds for that outsourced service. In both of these joined cases, this was not an issue.
Although the CJEU appeared to follow the reasoning of both cases, the matter is not closed because the CJEU instructed the Austrian referring court to determine whether the outsourced services are intrinsically related to and thus are specific and essential to the management of special investment funds. The referring court will therefore still have to reach a final decision.
The CJEU’s judgment provides more clarity on the scope of the term “management.” Of importance is the fact that both cases concern independent services. In practice, the outsourced tasks may also be incorporated in a broader range of services and for that reason may be treated differently for VAT purposes.
Tax professionals view the judgment that the exemption for the management of special investment funds does not require specific tasks to only be partially outsourced is not new, as this already follows from a prior judgment. The fact that the CJEU confirmed that this rule also applies to administrative tasks in the tax field is viewed as a welcome clarification. This implies that a fund manager can (partially) outsource several tasks to different parties without losing the application of the VAT exemption, provided that each of these services withstand the specific and essential test.
An important aspect of the judgment is that a software license for a one-off license fee may be intrinsically related and thus subject to the exemption for the management of special investment funds. In practice, the distinction between (VAT-able) IT services and (VAT-exempt) financial services is not always clear. To some extent, the current practice is that the granting of a software license in itself is subject to VAT. The tax authorities are not always willing to look at the functions of the software. There is, however, room for the application of a VAT exemption to the extent that the performance of financial services is fully automated. This sometimes means that a service provider must charge VAT when supplying software while the use of the same “software as a service” is VAT-exempt. However, many software suppliers may be unable to provide their services in the form of software as a service if, for example, a license from a regulator would be required.
The difference in the VAT treatment between software and software as a service may now have been eliminated by the CJEU, since the functions of the software are to be examined. Because the CJEU determined that the calculations made by the software are essential to risk management and performance measurement, and form a distinct whole in that regard, a software license without any additional services could qualify as management. The fact that the CJEU found that a software license may be specific and essential may be seen as favorable in the light of fiscal neutrality. The CJEU’s judgment specifically addresses the exemption for the management of special investment funds, but it could have a broader implications because the question of whether automated services qualify for the VAT exemption also often arises with respect to other VAT exemptions. The doctrine that the assessment whether a software license can fall under a VAT exemption is to be based on functionalities is, according to tax professionals, a correct approach giving consideration to the technological developments in the financial sector.
Read a June 2021 report prepared by the KPMG member firm in the Netherlands
Read more in a June 2021 report prepared by the KPMG member firm in Luxembourg
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