Netherlands: Broader application of VAT exemption for asset management fund exemption
Deputy Minister elaborated on the qualification of specific state supervision
Asset management fund exemption
An updated “Specific State Supervision Policy Statement” of the Deputy Minister of Finance was published on 2 November 2021. In this policy statement, the Deputy Minister elaborated on the qualification of specific state supervision—one of the conditions stipulated by the Court of Justice of the European Union (CJEU) for the application of the VAT exemption with regard to the management of special investment funds.
The updating of the original policy statement (March 2019) was necessary due to Supreme Court case law from December 2020, which entailed a broader interpretation of specific state supervision than that in the earlier policy statement.
In light of CJEU case law, the following conditions must be met in order to qualify as a “special investment fund” within the meaning of Article 135(1)(g) EU VAT Directive (that is, the VAT exemption):
- The fund must be financed by more than one participant.
- The contributed funds must be pooled for collective investment according to the principle of risk-spreading.
- The investment risk must be borne by the participants.
- Through their participation in the fund, each investor has a proportionate stake in the investments, but does not own the fund’s investments as such.
- The fund must be subject to specific state supervision.
The last condition was introduced by the CJEU in the Fiscal Unity X (C-595/13) case, and was confirmed by the Dutch Supreme Court in the Order for Reference issued in the Fiscal Unity X case in November 2016. In practice, this condition or limitation of the VAT exemption has raised many questions in the Netherlands.
What type of state supervision is sufficient?
In the original policy statement of March 2019, the Deputy Minister provided a framework for interpreting the condition for specific state supervision. According to the policy statement, if a fund complies with the condition for specific state supervision it must however still comply with conditions 1 through 4 in order to qualify as a special investment fund within the meaning of the VAT exemption.
Proportionate stake in, but not ownership of, the investments themselves
Before addressing the update of the interpretation of the condition of specific state supervision, the updated policy statement includes an additional condition for qualification as a special investment fund—one not in the original policy statement. This concerns the fourth condition, which stipulates that each investor must have a proportionate stake in the investments through the participation in the fund, but does not own the fund’s investments itself.
This condition is derived from the considerations of the Supreme Court in its judgments of December 2020, but as such has not been identified as a separate condition by the CJEU.
Tax professionals believe this condition is actually contained in the first three conditions. In any case, it appears that the inclusion of this condition in the updated policy statement cannot have been intended as a specific Dutch limitation of the exemption. There is no room for this under EU law. It seems rather that the Deputy Minister wanted to confirm that the assets of a fund can be pooled in other ways than by issuing shares or units of participation. The Supreme Court considered it decisive that the participants are entitled to the (monetary) value of a proportionate part of the assets of the fund.
Broader interpretation of specific state supervision
The reason for updating the policy statement is the Supreme Court’s broader interpretation in December 2020 of the required specific state supervision. The policy statement supplements the cases of specific state supervision referred to in the original policy statement.
The question in the December 2020 judgments of the Supreme Court was whether the VAT exemption for collective asset management can also be applied to an investment product offered by an asset manager under a license for individual asset management, whereby investments of individual investors are pooled on the basis of investment profiles. In that context, the question was also whether the requirement of specific state supervision had been met.
According to the Supreme Court, it is sufficient if the manager of a fund is under the supervision of the Authority for the Financial Markets (AFM), whereby it is irrelevant whether this supervision results from a license for collective asset management or a license for individual asset management. This broader interpretation is now explicitly laid down in the updated policy statement. A license as referred to in Section 2:96 of the Financial Supervision Act (Wet op het financieel toezicht) (MiFID II license) is sufficient in order to be subject to specific state supervision.
The updated policy statement addresses a number of specific situations concerning institutions and funds when, as a result of the broader interpretation by the Supreme Court, the condition of specific state supervision may be considered to have been met.
For example, the updated policy statement explicitly addresses the licensing obligation of banks. Banks are also allowed to provide investment services on the basis of their banking license. If a bank with a banking license acts as manager of a special investment fund, then the condition of specific state supervision is met.
The policy statement also confirms that the criterion of specific state supervision can be met in relation to investment funds exempt from corporate income tax, mutual funds, and companies offering collateralized loan obligations, etc., if they fall within one of the categories of specific state supervision referred to in the policy statement. This confirmation enhances legal certainty. In this context, however, the policy statement does explicitly state that conditions 1 through 4 must also be met in order for the VAT exemption for management services to apply.
The policy statement does not contain an exhaustive description of all situations that occur in practice—for example, the situation when the manager is established outside the Netherlands and is not required to have a license under the Financial Supervision Act, such as when the managed assets are invested in a foreign fund. The customer of the management services, established in the Netherlands, is then faced with the question of whether there is specific state supervision. For situations not explicitly referred to in the policy statement, it remains to be assessed on a case-by-case basis whether there is specific state supervision.
The updated policy statement has retroactive effect to 4 December 2020 (the date on which the Supreme Court rendered a broader interpretation of the condition of specific state supervision). The judgments and the updated policy statement are extremely important for the entire asset management market, as there is now more scope to apply the VAT exemption for collective asset management than before December 2020.
It is important for taxpayers to determine whether there is scope for applying the VAT exemption for collective asset management, both when providing asset management services and when purchasing asset management services (possibly from abroad).
Read a November 2021 report prepared by the KPMG member firm in the Netherlands
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