A broader interpretation by the Dutch Supreme Court of VAT exemption for collective asset management
Collective asset management is exempt from VAT, while individual asset management is taxed. The Dutch Supreme Court (the Court) recently ruled on the management of so-called investment trust accounts. According to the Court, management of investment trust accounts also falls within the VAT exemption for collective asset management. This decision effectively broadens application of the VAT exemption and may have consequences for other situations.
Background of the Dutch Supreme Court case
The case before Dutch Supreme Court concerned an asset manager that had a license from the Dutch Authority for the Financial Markets (AFM) to provide investment services and perform investment activities in the Netherlands.
Based on fixed investment profiles created by the asset manager, the manager’s clients could have their money invested by the asset manager. The clients’ money was invested in the same financial instruments in the same proportion per investment profile. Deviations on an individual client level were not permitted. Because of application of asset segregation obligations under the Financial Supervision Act, when a client wishes to invest, they deposit their money into a central account in the name of a foundation set up by the asset manager. Clients were allocated a so-called investment trust account representing their claim on the foundation. The value of the clients’ claims was expressed in securities and other financial instruments. The fee that the asset manager charged to its clients for its services was settled via each individual client’s trust account. The question in the case was whether this fee was subject to VAT or whether the exemption for collective asset management applied.
The Dutch Supreme Court’s judgment
The Dutch Supreme Court ruled that the asset manager’s services fall under the VAT exemption for collective asset management.
In the Netherlands, financial vehicles called Undertakings for Collective Investment in Transferable Securities (UCITS) and funds that are not UCITS but that have the same characteristics as these undertakings are considered collective investment funds. The management of these funds is subject to the VAT exemption. In the case before the Court there was no UCITS, so the Court had to decide whether there was a fund with characteristics similar to a UCITS. Generally speaking, a (mutual) fund is comparable to a UCITS if:
- the assets of various customers (individual investors) are pooled and invested in different financial instruments;
- investor risk is spread by the pooling; and
- each customer has a proportionate stake in the investments but does not own the investments.
According to the Dutch Supreme Court, how the customer’s assets were brought together in a central account by the asset manager and how the investor (the foundation) held the financial instruments had the essential characteristics of a collective investment fund. According to the Court, it is not relevant that the assets are not pooled in exchange for the issue of shares or participations. What is decisive is that the customers have a claim on the (monetary) value of a proportionate part of the fund's assets (held by the foundation).
The fact that the assets are not invested by the asset manager itself, but by the investor (the foundation) on behalf of the asset manager does not mean that the investor (the foundation) is not comparable to a UCITS. What is important is that the customers no longer have control over the purchase and sale of financial instruments.
Another requirement for qualification for the VAT exemption is that the investment fund must be subject to special government supervision, which is a term the Dutch State Secretary has interpreted narrowly.
In the case before the Court, the asset manager had a license for individual asset management from the AFM. The question was whether that was sufficient or whether the asset manager must have a license for collective asset management.
The Dutch Supreme Court concluded that because the license for individual asset management imposes similar requirements on the asset manager as the license for collective asset management, the asset manager fulfilled the special government supervision requirements. According to the Court, it is sufficient that the AFM supervises the asset manager. The required supervision does not need to be focused on the invested assets in the fund. In short, for the special supervision in the field of collective asset management, it is sufficient that the asset manager is supervised by the AFM, even if this is based on a license for individual asset management.
Thus, the Dutch Supreme Court's opinion deviates from the Dutch State Secretary's strict interpretation of 'special government supervision'. In our opinion, as a result of the Supreme Court’s decision, the Dutch State Secretary will have to amend the existing decree on this matter and so the result is the Court’s decision will have a broad effect on the issue of the nature of what constitutes special government supervision.
Importance for asset managers
The Dutch Supreme Court's decision is of great importance to asset managers, both for the levying of VAT on their services and the VAT consequences of the input tax on costs allocated to them. Asset managers should review their investment products to assess whether the VAT exemption for collective asset management can be applied where this has not been the case so far. This analysis will have to be made on a case-by-case basis.