VAT exemption for real estate funds

On May 20th 2015, Advocate General Juliane KOKOTT (the “AG”) published her opinion in the Fiscale Eenheid X case (C-595/13). Whereas Council Directive 2006/112/EC of November 26th 2006 on the common system of value added tax (the “VAT Directive”) provides for a general exemption of management services of collective investment vehicles, the Dutch Supreme Court asked the European Court of Justice (the “ECJ”) for a preliminary ruling on the following questions:

  1. whether a real estate investment fund falls within the definition of collective investment vehicle; and
  2. whether the fund management exemption also covers the actual management of immovable property invested in by the fund, which was entrusted to a third party.

On the first question, the AG recommends to the ECJ to rule that the nature of the investments of the fund is not decisive. Even though a real estate investment fund only invests in real estate, the AG considers the risk spread test as met, as the fund may invest in several real estate properties or even in one single large property, divided into several units. Her final conclusion is that all investment funds specifically regulated either by the UCITS Directive, by the AIFM Directive or by a special national regime may be considered as collective investment vehicles within the meaning of the VAT Directive, provided that the exemption purpose and the neutrality principle are met.

On the second question, the AG recalls that ECJ case law has not yet provided for a clear cut definition of the concept of “management”. So far, the ECJ has only held that a given service has to be “specific” to the activity of the collective investment vehicle in order to qualify for the VAT exemption for fund management services. According to the interpretation of the AG, any service that is necessary to guarantee the preservation of the value of the underlying investments, as well as the generation of a return on such investments is to be considered as “specific” to the activity of the fund. Applying said criterion to the case at hand, the AG comes to the conclusion that, as the actual management of immovable property is necessary to preserve the value of the real estate property held by the fund, such services should be considered as covered by the VAT exemption.

"It should be remembered that the ECJ does not necessarily follow the opinion of the AG."

However, should the recommendations of the AG be adopted, the key consequences would be the following:

  • The management of any regulated investment fund, regardless of the type of investment would be VAT exempt ; and
  • Fund managers would not be entitled to deduct input VAT on their costs related to such exempt management services.