VAT exemption for management of collective investment funds expanded
On 2 November 2021, the Dutch State Secretary updated the official policy on the interpretation of the “specific state supervision” requirement to qualify as a collective investment fund. This is important because the management of assets pooled by investment funds and investment companies for the purposes of collective investment is exempt from VAT (under Dutch law and the EU VAT directive). The update was necessary to bring government policy in line with a 4 December 2020 Supreme Court decision, in which the court interpreted the specific state supervision requirement more broadly (for coverage of this decision, see our article in the April 2021 issue of Indirect Tax News). The revised policy applies retroactively to the date the Supreme Court decision was issued.
Background and overview of the updated policy
The Court of Justice of the European Union (CJEU) added the specific state supervision as a requirement to qualify for the VAT exemption for the management of collective investment funds in a decision (Fiscale Eenheid X) issued in 2015. The other requirements are: (i) the fund must be financed by more than one participant; (ii) investor risk must be spread by the pooling of investors’ assets; and (iii) the fund participants must bear the investment risk. Unfortunately, the CJEU did not define the scope of the supervision requirement, which has led to uncertainty and controversies in this area.
In 2019, the Dutch State Secretary issued a decree that described what is meant by the term specific state supervision for certain collective investment funds. Amongst other things, the State Secretary took the position in that decree that the VAT exemption did not apply to products that fall under the regulatory regime for individual asset management.
As noted above, the 2020 Supreme Court decision resulted in a broader interpretation of the scope of specific state supervision. The court held that it is not necessary that the fund assets are supervised to qualify for the VAT exemption—it is sufficient that an asset manager is supervised by the Authority for Financial Markets (AFM) on the basis of the manager’s license, even a license for individual asset management, as in the current case (such a license has similar requirements as a license for collective asset management).
In the 2021 decree, the State Secretary adopts the broader scope of the specific state supervision requirement as set forth by the Supreme Court. Supervision carried out by investment firms that have a MiFID II license under article 2:96 of the Act on Financial Supervision and that provide individual asset management under that license also qualifies as specific state supervision within the meaning of the VAT exemption.
The new decree also affects banking institutions, collateralized loan obligations (CLOs) and asset management in cross-border situations:
- Banking institutions: Under the Act on Financial Supervision, banking institutions with a banking license from the Dutch central bank are subject to supervision by both the bank and the AFM. Based on the banking license, banking institutions may also provide investment services. According to the State Secretary decree, specific state supervision is met in this case.
- CLOs: Following the CJEU decision introducing the specific state supervision requirement, the Dutch tax authorities terminated several approvals under which collateralized obligations applied the VAT exemption for collective asset management. With regard to the 2020 Supreme Court decision, the State Secretary decided to postpone the termination of old approvals. The 2021 decree provides that special government supervision may also apply to tax-exempt investment institutions, mutual funds and CLOs, etc. provided they fall within the scope of one of the categories mentioned in the decree. The decree also reiterates that the other requirements for the application of the VAT exemption for collective asset management must be met.
- Cross-border situations: Asset managers from another EU member state that have a license in that member state can provide asset management services in the Netherlands if the relevant conditions under the Dutch Act on Financial Supervision are satisfied. The 2019 decree stated that the specific state supervision requirement is met in cross-border situations. The new decree adds that investment firms from another EU member state or firms with a Dutch branch may offer investment services if they comply with specific rules in the Act on Financial Supervision and this also constitutes specific state supervision.
For managers established outside the EU, there was already specific state supervision if the non-EU manager had a license under article 2:65 or 2:69b Act on Financial Supervision. The new decree adds a license under article 2:96 (which requires all persons providing investment services in the Netherlands to be authorised by the AFM) and also includes investment firms that fall under article 10 of the exemption regulation under which certain investment firms will be exempt from the requirement to obtain a license from the AFM.
In our view, the updated decree is welcome and to a certain extent puts an end to the unequal playing field for investment funds that arose due to the limited interpretation of the specific state supervision requirement. Although the broader interpretation will not provide a solution for every situation (since a case-by-case determination will be needed to ascertain whether the specific state supervision requirement is met), it will offer legal certainty. As mentioned above, the updated decree applies retroactively to 4 December 2020, and offers practitioners the opportunity to apply the collective asset management exemption in more situations.
In view of the updated decree, potentially affected funds should re-assess their VAT position to determine whether the exemption for collective asset management can be applied and which actions should be taken.