Indirect Tax News - December 2019

French Draft Finance Bill for 2020 - Changes in the scope of VAT exemption for collective investment funds

Article 9 of the Draft Finance Bill for the year 2020 aims to redefine and clarify the scope of the VAT exemption applicable to the management of collective investment funds known as Undertakings for the Collective Investment in Transferrable Securities (UCITS)(OPCVM in French).

Under current legislation (article 261 C, 1°, f) of the French Tax Code (FTC)), the exemption applies only to: UCITS, Alternative Investment Funds, and Special Purpose Vehicles (Fonds Communs de Créances in French). As a result, property funds are excluded from the exemption’s scope.

This wording, which limits the exemption to those types of funds listed, is not compliant with European Union Court of Justice (CJEU) case law, notably ruling nr. C-595 “Fiscale Eenheid” of 9 December 2015. That ruling states that the management of a property is eligible for the exemption (provided for by article 135, 1, g) of the VAT Directive) that is applicable to “the management of special investment funds”.

The CJEU had previously ruled that article 13 of the VAT Directive (which provides for the exemptions to the VAT Directive) included special investment funds regardless of how they are legally structured (Abbey national, nr. C-169/04, of 4 May 2006). The CJEU also specified that funds could be considered special investment funds despite not qualifying as collective investment funds in the sense of the UCITS Directive, as long as the funds possessed characteristics similar to UCITSs in terms of organisation and activity to the point of being in competition with them (ECJ, nr. C-464/12, March 13, 2014).

The French Draft Finance Bill provides that the VAT exemption provided for the management of UCITS (as defined by the UCITS Directive 2009/65/CE) shall apply to other investment funds that share similar characteristics with UCITSs. The Draft Finance Bill provides that a governmental decree will be published in order to list the exempt funds.

Depending on the ultimate wording of the Draft Finance Bill and the related upcoming decree provisions, special investment funds, and notably property funds, may need to revise their structure to optimise their treatment for VAT purposes.

David Hirsch