EU VAT Updates

VAT exemption for certain fund management services

The Court of Justice of the EU (“CJEU”) issued a judgment on 17 June 2021 in the joined cases of K (C-58/20) and DBKAG (C-59/20)1 considering whether VAT exemption applies to certain outsourced services procured by fund managers in connection with their management of specified investment funds (“SIFs”). The case was referred by the Austrian Courts. There is an equivalent VAT exemption in Ireland for the management of certain collective investment undertakings, life assurance undertakings, defined contribution pension schemes and Section 110 authorised companies.

The CJEU held that, if specific conditions are met, VAT exemption can extend to certain tax compliance services outsourced by fund managers and to software acquired by fund managers to enable them to undertake the risk management and performance measurement calculations provided the services are intrinsically connected to the management of SIFs and are provided exclusively for the purpose of managing such funds. It is a matter for the Austrian Courts to assess whether these conditions were met in these specific circumstances.

In the case of K (C-58/20), K was engaged by fund managers to assist with preparing tax calculations and providing tax statements for until holders of the funds, with the fund managers having responsibility for filing declarations to the authorities. In the case of DBKAG (C-59/20), DBKAG, a fund manager, acquired software which enabled it to calculate certain risk and performance indicators, the reporting of which was required under Austrian law. The software was specifically tailored to the investment fund industry and was integrated to DBKAG’s existing software. The Austrian tax authorities challenged VAT exemption applying to the outsourced services in both cases.

The CJEU reaffirmed that in order for VAT exemption to apply to services outsourced by a fund manager, the services must, viewed broadly, form a distinct whole that fulfils the specific and essential functions of the management of SIFs. With regard to the requirement for outsourced services to form a distinct whole, the CJEU confirmed that it is not necessary for a task to be completely outsourced in order for VAT exemption to apply.

The CJEU held that it is possible for the outsourced services in these cases to qualify for VAT exemption provided that the services are found to be “specific and essential” to the management of SIFs and “intrinsically linked” to the management of a SIF. The Court however referred the matter back to the Austrian court to determine that the necessary conditions for VAT exemption were met, based on the information available to it. Therefore, it continues to be necessary to review services in detail to confirm whether the conditions for exemption are met.

Irish VAT Updates

Revenue e-Briefs

Readers will be aware that new VAT rules for e-commerce businesses came into effect on 1 July 2021. Revenue eBrief 126/21 advises that a number of new Tax and Duty Manuals have been published to provide guidance in respect of these new rules. This includes detailed guidance on the One Stop Shop (“OSS”) for the Union and non-Union scheme, the Import One Stop Shop (“IOSS”), the implications for electronic interfaces/marketplaces, and special arrangements designed for postal operators or carriers declaring low value goods for importation.

Revenue eBrief 130/21 issued on 1 July 2021 provides that the customs manual on import VAT has been updated, which takes account of the new e-commerce changes from 1 July. In addition, guidance has been added to this manual in respect of the import of vehicles into Ireland, primarily as a result of the UK leaving the EU.

Annual VAT recovery rate adjustment

Businesses that are engaged in both VAT exempt and VAT taxable activities with a 31 December year end are required to complete their annual VAT recovery rate review for 2020 and reflect any necessary VAT adjustment in their May/June 2021 VAT return (due by 23 July 2021) at the latest in order to avoid the risk of interest and penalties. This is particularly relevant to business in the financial services sector, healthcare, education and public sector or any other sector where there is a mix of taxable and exempt supplies.

David Duffy is Indirect Tax Partner at KPMG