11 November 2013

New Circular issued by the Luxembourg VAT Authorities confirming that risk management services for funds could be VAT exempt

Luxembourg Tax Alert

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On 7th November 2013, the Luxembourg VAT Authorities (“Administration de l’Enregistrement et des Domaines”) issued a Circular (Circular n° 723 ter) confirming that risk management services for funds could be VAT exempt.

Background

The AIFM law of 12th July 2013 has modified article 44.1.d) of the Luxembourg VAT Law (implementing article 135.1.g) of the EU VAT Directive 2006/112) in order to ensure that all AIF’s will be eligible to receive VAT exempt management services, in the same manner as UCITS (see our Tax Alert of July 2013 – Revised list of investment funds capable to receive VAT exempt management services). If article 44.1.d) lists the entities eligible to receive VAT exempt services, it does however not define the eligible services.

In the AIFM context, the manager must assume two functions: the portfolio management and the risk management. The manager may delegate one of the functions but not both. While it appears quite clearly from the existing sources (European Jurisprudence, Circular 723 of 29 December 2006) that portfolio management services could be considered as VAT exempt management services, this was less clear for the risk management services while their importance are increasing in the current regulatory, financial and economic environment.

The Circular and implications

This Circular n°723 ter clearly confirms that the risk management services should be considered as management services exempt from VAT pursuant article 44.1.d) of the Luxembourg VAT law.

When the manager sub—contracts a part of these services to a third party, the VAT exemption could be achieved under some conditions. In this respect, the Circular 723 ter refers to the Circular 723 bis of 30 April 2010 which confirms that sub-contracted services could be VAT exempt to the extent that these services should not be considered as “isolated” services and if the criteria defined by the Court of Justice of the European Union are met.

In its Abbey National case (C-169/04, 4 May 2006), the Court ruled that sub-contracted services could be VAT exempt if “view broadly” they forms “a distinct whole” and are “specific and essential to the activity of the fund”. The Court further clarifies the conditions in the recent case GfBk (C-275/11 – 7 March 2013) where the Court ruled that investment advisory services could qualify as VAT exempt management services because they are “intrinsically connected” to the activity of the fund (see our Tax Alert of March 2013 – Application of the VAT exemption to advisory services rendered to investment fund management companies and of November 2012 – Opinion of Advocate General on the application of a VAT exemption to advisory services for investment fund management companies).

This Circular is a positive step for the Luxembourg investment fund industry by ensuring a favorable VAT treatment to services as fundamental as risk management services. Indeed, investment funds have, in principle, no right to recover the VAT incurred on their costs. However, it is important not to rely on this Circular to apply the VAT exemption to any type of service rendered to a fund or delegated to a third party by the manager of a fund or by other services provider. A careful, “case by case” approach remains advisable. It is also important to keep in mind that the exemption implies that services providers could not recover the VAT incurred on their own costs.

If you like to discuss the potential implication of the Circular on your business in more detail, please contact a member of the EY VAT team.

 

Download the tax alert. (pdf, 91kb)