On 11 March 2020, the Advocate General (AG) Pikamäe of the Court of Justice of the European Union (CJEU) provided his opinion on the BlackRock Investment Management (UK) Limited VAT case. At issue is whether a single supply of management services rendered for the benefit of both qualifying and non-qualifying investment funds can be split, so that part of the payment for these services is VAT-exempt.
BlackRock is the representative member of a VAT group that includes several companies operating as fund managers. BlackRock receives services from BlackRock Financial Management Inc. (BFMI) — the group’s U.S.-established company — which are then used to manage both SIFs and other investment funds (non-SIFs).
The Aladdin software platform offers what is considered a single supply of management services through a combination of hardware, software and human input. Aladdin provides performance and risk analysis and monitoring to help portfolio managers make investment and trading decisions, along with regularly monitoring compliance.
The majority of the funds for which BlackRock provides management services — by both volume and managed assets — are non-SIFs.
What is the BlackRock VAT case about?
The case at hand isn’t how “management” is qualified regarding the services Aladdin provides, because the UK court has already decided on this qualification.
Instead, it’s about how an apportionment, calculated on a pro-rata basis, could be applied to the management fees of these SIFs/non-SIFs services. BlackRock submits that payments for Aladdin services relating to SIFs should be considered VAT exempt — while, on the contrary, the tax authorities believe that all Aladdin services received by BlackRock should be subject to VAT, since the company mostly manages other funds.
This issue was first raised before the UK’s First-tier Tribunal, which decided to refer to the CJEU whether article 135, 1, g) of the Directive 2006/112/EC (“the VAT Directive”) allows a pro-rata application to a single supply of management services based on its use — either for the management of SIFs or non-SIFs.
What did Advocate General (AG) Pikamäe suggest?
Regarding this case’s particular situation, AG Pikamäe does not support any split of the taxable basis on the grounds that one part of the supply is used for the management of SIFs (exempt) and another part for the non-SIFs (taxable).
AG Pikamäe’s opinion is that the services should be considered as a single supply, because the Aladdin platform provides BlackRock managers with a range of information granting them access to different stages of the investment activity. As the BlackRock managers use a combination of different elements to carry out their activity, these elements can only be considered as bound together into a single stream of services.
AG Pikamäe dismissed all the examples where the Court agreed to consider the different elements that made up a single supply of services, as they refer to exceptions that do not apply to the present case. According to AG Pikamäe, article 135, 1, g) of the VAT Directive precludes a distinction between the SIF part and the non-SIF part.
This is because the spirit of article 135, 1, g) of the VAT Directive is to support the “investment in securities by means of investments undertakings by excluding the cost of VAT” — therefore, allowing the choice between directly investing in securities and investing through undertakings for collective investment. According to AG Pikamäe, this illustrates the application of the neutrality principle to the present situation.
Therefore, he concludes that the amount of VAT due for the management of non-SIFs cannot be calculated, because it is impossible or very difficult to determine the proportion in which BlackRock uses the Aladdin services to manage SIFs. As a direct result, the management services in their entirety should be subject to VAT and not benefit from a VAT exemption.
However, AG Pikamäe underlines that the services could be VAT exempt if it were possible to identify precisely which services specifically relate to the management of SIFs, i.e. via data furnished from the supplier.
KPMG Luxembourg’s comment
The publication date of the final decision is unknown at this stage. But should the court decide to follow AG Pikamäe’s opinion, this could have far-reaching consequences for Luxembourg investment fund managers and other service providers. Our team of VAT experts will continue to analyze the potential implications of this case and plan accordingly.
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