Important step towards the VAT exemption of investment advice for funds

On 8 November 2012, the Advocate General ("AG") released his conclusions before the Court of Justice of the European Union ("CJEU") in the "GfBk" case (C-275/11) which deals with the question of whether investment advisory services in
the fund industry benefit from a VAT exemption.

Current situation

Luxembourg currently exempts such investment advisory services from VAT, deeming them to form part of the management of investment funds (such fund management services being VAT exempt as per the VAT Directive). As regards their delegation to third parties, Luxembourg VAT authorities consider that the VAT exemption applies if the delegated services, viewed broadly, form a distinct whole specific to, and essential for, the management of investment funds (criteria set out by the CJEU in the Abbey National case, C-169/04, in relation to sub-contracted fund management services).

Several other countries, such as Germany, France, the UK and Ireland, exclude investment advisory services from the scope of application of the aforementioned exemption. A uniform definition of the term ‘management of investment funds' does not exist at EU level.

Question referred to the CJEU

On 3 June 2011, the German Federal Court of Finance referred to the CJEU a question intended, essentially, to achieve clarity on whether the provision of advice on investment in transferable securities by a third party to an investment fund management company constitutes ‘fund management' for the purposes of the exemption laid down in article 135, (1), g) of the VAT Directive.

Conclusions of the Advocate General

The AG analyzed the question in the light of the CJEU's ruling in the abovementioned Abbey National case and, thus, especially took into account

  • the intrinsic connection of the service to the activity of the fund;
  • the autonomy of the service vis-à-vis the activity of the fund;
  • the need for a certain degree of continuity in the service;
  • the irrelevance of the criterion of a change in the legal and financial situation;
  • the strict interpretation of the exemption provided for in the VAT Directive.

Summarizing, the AG suggests that article 135, (1), g) of the VAT Directive should be interpreted as meaning that an advisory and information service provided by a third party, relating to the management of an 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 incumbent on the national court to verify.

Consequences of the AG's conclusions

Although the CJEU's decision has yet to be taken (in the course of the first or the second quarter 2013), the AG's conclusions may be regarded as an important step in the right direction and are supportive of the current Luxembourg position. In any case, attention would have to be paid to the strict conditions set out by the AG as potentially confirmed by the CJEU and their impacts on the investment advisory agreements would need to be analyzed.