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France: Expanded VAT exemption for funds management operations

France: Expanded VAT exemption for funds management

Administrative guidelines issued in early May 2020 address an exemption from value added tax (VAT) regarding the management operations of certain funds.

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When the fund satisfies four conditions, it may benefit from an exemption from VAT on its management operations, whereas previously, only certain funds were covered by the VAT exemption.


Background

Under measures effective for 2020, Article 33 of the French Finance Act n°2019-1479 (28 December 2019) amended provisions of the French tax law that relate to the exemption from VAT for certain transactions. Specifically, a VAT exemption applies regarding the management of UCITS (“undertakings for the collective investment in transferable securities”), alternative investment funds, and collective investments with similar characteristics. This broadened scope of the VAT exemption helped clarify areas from the prior regime.

Under former Article 261 C 1° f) of the French tax law (CGI), reference was only made to UCITS and alternative funds that were expressly listed in the Monetary and Financial Code, and this largely restricted the application of VAT exemption. When a new type of fund was created from a regulatory standpoint, this gave rise to uncertainty due to the restrictive nature of the references to the Monetary and Financial Code and the strict interpretation of any exemption mechanism. This uncertainty was further aggravated by a December 2015 judgment of the Court of Justice of the European Union (CJEU) in case C-595/13, Fiscale Eenheid X NV concerning real estate funds. In that judgment, the CJEU held that real estate funds could benefit from a VAT exemption as provided for by Article 135(1)(g) of Directive 2006/112/EC of 28 November 2006 concerning a common system of VAT, subject to compliance with conditions set forth in prior case law. 

However, there was no change made to the French law or to the position of the French tax authorities to reflect compliance with the broadened scope of the VAT exemption.


Reference to European legislation

Because of reference to European legislation and particularly to the funds covered by the UCITS Directives and now by the AIFM Directive, certain alternative investment funds that were not explicitly covered by the French statutes are allowed to come within the scope of the VAT exemption.

Article 261 C 1° f) CGI now refers to:

  • Undertakings for collective investment in transferable securities (UCITS) mentioned in paragraph 2 of Article 1 of Directive 2009/65/EC of 13 July 2009
  • Other undertakings for collective investment with similar characteristics (the reference to Directive n°2011/61/EU of 8 June 2011 (AIFM Directive) is indirect because it does not result from the legal text but from the administrative comments (BOFIP as noted below)

The connection regarding alternative investment funds covered by the European directive is now well established. For French alternative funds, it has nevertheless been clarified by a new Article 71 Annex III CGI (from Decree 2020-493 of 28 April 2020) which includes a list of French alternative investment funds covered by the statutory text, with the term "notably" (English translation) thus reflecting the lawmakers’ desire to avoid prior misunderstandings.

The reference to the funds covered by the AIFM Directive may be confusing because it does not regulate the funds themselves, but the companies that manage them. Only EU Member States are authorized to recognize alternative investment funds. However, this will allow the scope of the exemption to be extended to European AIFs, provided that they comply with the conditions set out in European case law, as described below.


New conditions for exempting collective investments with similar characteristics

Article 261 C 1° f) CGI also refers in a more general sense to other collective investments with characteristics similar to UCITS and that are in competition with UCITS. In order to benefit from exemption, funds must meet four conditions that have been established by European case law over the years. Given the CJEU judgment in 2015, funds that may benefit from a VAT exemption must have similar characteristics to UCITS and therefore must conduct similar operations (thereby placing them in a competitive situation) in order to be treated in the same manner.

Administrative guidelines dated 6 May 2020 (BOI-TVA-SECT-50-10-10-20200506 paragraph 335) specify cumulative conditions for the exemption of funds provided for by Article 261 C 1 f) of the CGI. For the tax authorities, these conditions also apply regarding alternative investment funds and are as follows:

  • Being a collective investment
  • Operating on the principle of spreading the risk
  • Being subject to specific state supervision
  • Having a return on investment that is subordinate to performance of the investments, thus implying that asset holders must assume the risks inherent in the management of the assets

When the fund meets these four conditions, it may benefit from the VAT exemption on its management operations, whereas previously, only UCITS and funds listed in the Monetary and Financial Code were covered by the exemption.


KPMG observation

The guidelines provide very little detail on these points. Nevertheless, the tax authorities have commented on the third condition—that is, the condition relating to state supervision. The comment is that this state supervision is assessed at the level of the collective investment, and not at the level of the management company, and is deemed to be met as soon as the collective investment is registered, declared or notified with the competent authorities. State supervision differs from one country to another, but the administrative doctrine sets forth a fairly broad presumption.

Read a May 2020 report [PDF 93 KB] prepared by the KPMG member firm in France


For more information, contact a tax professional with KPMG Avocats in France:

Philippe Breton | +33 6 13 29 95 92 | philippebreton@kpmgavocats.fr

Cédric Philibert | +33 6 34 67 58 82 | cedricphilibert@kpmgavocats.fr

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