Luxembourg Tax Alert 2020-14
Luxembourg Tax Alert 2020-14
Blackrock Investment Management (UK) Ltd (C-231/19): here is the case!
On 2 July 2020, the case in BlackRock was published by the Court of Justice of the European Union (CJEU).
The CJEU decided that a supply of services provided through an IT platform for the benefit of SIFs and non-SIFS could not be VAT exempt under article 135, 1, g) of the VAT Directive, and therefore considered the whole supply as subject to VAT.
Reminder of facts:
BlackRock is a member of a VAT group established in the UK. More precisely it plays the role of the representative of the group which includes a number of companies carrying fund management activities.
Blackrock manages special investment funds (SIFs) as well as other funds. The SIFs constitute the minority of the funds managed by Blackrock (by both volume and managed assets).
For the management of all its funds, Blackrock receives supplies of services from a company established in the US, BlackRock Financial Management Inc (BFMI). This company provides services through a platform named Aladdin. The services at hand comprise a combination of hardware, software and HR. More specifically, Aladdin provides portfolio managers with market analysis and monitoring to assist in the making of investment decisions; monitors regulatory compliance and enables the portfolio managers to implement trading decisions. These services are considered as a single supply, to whichever funds they relate to.
Blackrock declared such services through the reverse-charge mechanism and considered that the VAT exemption for management services (article 135, 1, g) of Directive 2006/112/EC on value added tax, hereafter VAT Directive) should apply to the part of the services related to SIFs. It therefore only applied VAT on the rest (services provided by BFMI related to other funds) and calculated an apportionment based on a prorata in accordance with the amount of the other funds within the total of the funds managed.
The tax authority disagreed with this method and issued recovery notices which BlackRock contested before the UK courts. The last instance UK Court made a preliminary reference to the CJEU, thereby willing to confirm whether there can be in this case a ‘single supply of management services’ provided through a software platform belonging to a third-party supplier for the benefit of a fund management company which manages both SIFs and other funds. If the answer to this question is yes, the question on how to apply the VAT exemption may then be answered.
The court first reminds that the VAT exemptions must be interpreted strictly, as they constitute derogations to the general principle that VAT should apply to each transaction.
Considerations on the ‘single supply’ notion
As regards the ‘single supply notion’, the Court emphasizes the implications of its case-law.
According to the CJEU, it can cover 2 types of situations:
- The first situation is where one or more elements of a supply must be regarded as ancillary to a principal service (as they do not necessarily constitute an aim in themselves in acquiring the service/the good for the customer).
- The second situation is that inseparable elements of a single supply may be placed on the same footing, so that one cannot be considered as the principal service in comparison to the other.
The court is of the opinion that in the BlackRock case, as it is not clear enough whether a distinction within the supply provided by the platform is possible or not, this should mean that all the services rendered via the platform appear to be equally necessary to allow investment transactions to be made under good conditions.
Therefore, the court concludes that the supply at hand must be seen as having different elements, all of them being on the same footing. Hence, we find ourselves in the second situation as regards BlackRock’s case.
Considerations on the application of various VAT rates to the same single supply
According to the court, a single supply made of different elements must be subject to only one VAT rate, as applying different VAT rates to the same supply would lead to an artificial split of the transaction at hand.
Taking into consideration the wording of article 135, 1, g) of the VAT Directive, the Court underlines that this exemption is exclusively defined in relation to the nature of the supply in question. As a result, this precludes the dissociation of the elements of a single supply of funds management according to their use and beneficiaries.
Any other interpretation would create the risk to apply a VAT exemption to other funds, which is contrary to the objectives of the VAT exemption provided for in article 135, 1, g) of the VAT Directive.
The nature of the majority of the funds managed by BlackRock can therefore not be used to determine the VAT treatment of the supply of services rendered by Aladdin.
Decision from the CJEU
Based on the elements mentioned above and considering that the supplies do not fulfill the conditions to qualify for the VAT exemption applicable under article 135, 1, g) of the VAT Directive, the court concludes that the whole supply must be subject to VAT.
As a consequence, the single supply of management services provided through Aladdin by BFMI to BlackRock for the management of SIFs and non-SIFs must be considered as taxable.
The conclusion of this case should have far reaching consequences for Luxembourg investment fund managers, custodians and other services providers. What could be the potential implications of the conclusion in this case for the VAT treatment of services rendered to investment funds? Our team of VAT experts is therefore at your disposal should you wish us to analyze the potential implications for your business and plan accordingly.
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