On 10 August 2016, the Luxembourg court of appeal overturned the decision of the Luxembourg lower administrative tribunal regarding the VAT treatment of fund investment management services supplied by a Luxembourg based asset manager to an Irish SICAV and entirely delegated to a US service provider. Arendt & Medernach's intervention for the asset manager concerned (i) the right of VAT deduction of the Luxembourg asset manager and by extension, (ii) the VAT exemption applicable on the delegated services.
Regarding the supply of services to the Irish SICAV, these services are deemed to be located in Ireland according to the place of supply rules for VAT purposes (B2B services). The question was therefore not whether Luxembourg VAT applied or not on these services, but rather what was the impact of such activity on the right of VAT deduction of the Luxembourg service provider. Indeed, when confronted with a B2B supply of services that is deemed to be located abroad, the Luxembourg VAT Law contains a specific provision - article 49, §2, under b) - whereby a right of VAT deduction is recognised if the foreign supply would have been subject to VAT in Luxembourg in the event that it was located in Luxembourg. When applying this provision, a specific issue arose in relation to article 44, §1, under d) of the Luxembourg VAT Law (under its previous version) which exempts the management of eligible funds from VAT; such provision however limited the application of the VAT exemption to funds which are under the supervision of the CSSF in Luxembourg.
Contrary to the decision of the tribunal, the court of appeal ruled that the mechanics of article 49, §2, under b) and the fiction in relation thereto should take into consideration the factual elements as they are, without adapting these facts in the context of the fiction. This means that, in the case at hand, if the supply of investment management services to the Irish SICAV was located in Luxembourg, these services would have been subject to Luxembourg VAT (considering that the Irish SICAV was not under the supervision of the CSSF). As a consequence, this activity gives a full right to VAT deduction, implying that the delegated services (also subject to Luxembourg VAT because of the specific purposes of the Irish SICAV) should be neutralised from a VAT deduction perspective.
This new case offers certain perspectives in terms of VAT impacts for cross-border transactions, especially in an environment which is not harmonised from an EU VAT perspective. Regarding the fund industry, article 44, §1, d) of the Luxembourg VAT Law has in the meantime been modified so as to cover not only eligible funds under the supervision of the CSSF but also foreign funds subject to similar supervision.