Flashback on ECJ Cases C-169/04 (Abbey National) – Management activities for investment funds completely exempt from VAT

On May 4, 2006, the ECJ issued its decision in the case C-169/04 (Abbey National).

Context: Sixth VAT Directive – Article 13B(d)(6) – Management of special investment funds – Exemption – Meaning of ‘management’ – Functions of a depositary – Delegation of administrative management function

Article in the EU VAT Directive

Article 13B(d)(6) of the Sixth Directive (Article 135(1)(g) of the EU VAT Directive 2006/112/EC)

Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

(d) the following transactions:

6. management of special investment funds as defined by Member States

Facts

Abbey National Unit Trust Managers Limited and Scottish Mutual Investment Managers Limited, members of the Abbey National VAT group, are the managers of 15 and 11 authorised unit trusts respectively.
The trustees of those trusts are either Clydesdale Bank plc (‘Clydesdale’), Citicorp Trustee Company Limited (‘Citicorp’) or HSBC Bank plc (‘HSBC’). The referring tribunal states that those companies charge a general fee for their trustee functions. Although Clydesdale and HSBC also act as custodians, the general trustee fees which they charge do not cover global custody services, for which a separate fee is charged, whereas Citicorp, as trustee, does not act as custodian.
Inscape Investments Limited was appointed ACD of Inscape Investment Fund and Abbey National Asset Managers Limited was appointed ACD of three other OEICs. Inscape Investments Limited and Inscape Investment Fund are also members of the Abbey National VAT group.
Citicorp was appointed depositary of those four OEICs and charges a general fee for its services. However, it does not act as custodian of those OEICs.
Towards the end of 2000, Inscape Investments Limited entered into an agreement on Inscape Investment Fund’s accounting with Bank of New York Europe Limited and, subsequently, with Bank of New York (‘Bank of New York’). Under that agreement, Bank of New York undertook to perform a raft of services delegated by Inscape Investments Limited, in particular computing the amount of income and the price of units or shares, the valuation of assets, accounting, the preparation of statements for the distribution of income, the provision of information and documentation for periodic accounts and tax, statistical and VAT returns, and the preparation of income forecasts.
Bank of New York also undertook to provide other services such as data processing, fund reconciliation, calculation and recording of charges and expenses, recording of corporate events, distribution of daily sub-fund prices to the press, production of tax and VAT returns and returns to the Bank of England, calculation of distribution rates and yields, and answers to enquiries from Inscape Investments Limited and/or the depositary.
Abbey National brought an action on the ground that the VAT had been reclaimed by several of the trustees of the authorised unit trusts managed by its subsidiaries, and Inscape Investment Fund brought an action on the ground that its depositary was reclaiming the VAT from it.
In addition, Abbey National challenges the charging of VAT by Bank of New York to Inscape Investments Limited on the administration and accounting services that Bank of New York supplied as fund administrator.
Abbey National also contends that the services supplied by Bank of New York are exempt from VAT because they constitute ‘management of special investment funds’ under Article 13B(d)(6) of the Sixth Directive. In that regard, it points out that the administration of a fund clearly forms part of its management and that the subcontracting of all the administrative facets of management or of a large proportion of them, which form a specific and essential part of management, should not be treated differently from the subcontracting of some of the decisions as to the selection of investments.
Abbey National and Inscape Investment Fund also contend that the services, other than custody services, supplied by the trustees of an authorised unit trust and by the depositary of an OEIC are also exempt under Article 13B(d)(6) of the Sixth Directive. Verification and decision-making functions performed by the depositary or the trustee are both comprised in management functions.
The decision requesting a preliminary ruling states that, according to the Commissioners, the specific and essential function of the management of special investment funds is investment management involving the selection and disposal of the assets under management. They argue that this excludes the services supplied by the trustees and depositaries from the scope of the exemption, since they are not generally directly involved in day-to-day investment management decisions, and their primary role is to protect the consumer and investor. That also excludes the administration services supplied by the fund administrator from the scope of the exemption, since none of those involves the selection and disposal of the assets under management.
The referring tribunal does not find the scope of the exemption contained in Article 13B(d)(6) of the Sixth Directive to be clear. It points out, in that regard, that there is a disparity between the practices of the Member States as to the treatment of the transactions at issue in the main proceedings.

Questions

1. Does the exemption for “management of special investment funds as defined by Member States”, contained in Article 13B(d)(6) of the Sixth VAT Directive¹ mean that the Member States have the power to define the activities comprising the “management” of the special investment funds, as well as the power to define the special investment funds which may benefit from the exemption?

2. If the answer to question 1 is no and the term “management” in Article 13B(d)(6) of the Sixth VAT Directive is to be given an independent Community law meaning, in the light of Council Directive 85/611/EEC as amended on the co-ordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (“the UCITS Directive”), are charges made by a depositary or trustee for the services it provides pursuant to articles 7 and 14 of the UCITS Directive, national regulatory provisions and the relevant fund rules, exempt supplies of “management of special investment funds” under Article 13B(d)(6) of the Sixth VAT Directive?

3. Again, if the answer to question 1 is no and the term “management” is to be given an independent Community law meaning, does the exemption for the “management of special investment funds” in Article 13B(d)(6) of the Sixth VAT Directive apply to services performed by a third party manager in respect of the administrative management of the funds?

AG Opinion

(1) The concept of ‘management’ within the meaning of Article 13B(d)(6) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment is an autonomous concept of Community law from which Member States may not diverge.

(2) Services provided by a depositary within the meaning of Articles 7 and 14 of Council Directive 85/611/EC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities are exempt from value added tax under Article 13B(d)(6) of the Sixth Directive if:

– they form a distinct whole and are essential for and specific to the management of the common fund or investment company, and

– the focus of those services is not on activities of safekeeping and administration within the meaning of Article 13B(d)(5) of the Sixth Directive.

(3) Services provided by an external manager in the form of administrative operations in the management of the fund are exempt from value added tax under Article 13B(d)(6) of the Sixth Directive if they form a distinct whole and are essential for and specific to the management of the common fund or investment company.

Decision

1. The concept of ‘management’ of special investment funds in Article 13B(d)(6) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment has its own independent meaning in Community law whose content the Member States may not alter.

2. Article 13B(d)(6) of Sixth Directive 77/388 is to be interpreted as meaning that the concept of ‘management of special investment funds’ referred to in that provision covers the services performed by a third-party manager in respect of the administrative management of the funds, if, viewed broadly, they form a distinct whole, and are specific to, and essential for, the management of those funds.

On the other hand, services corresponding to the functions of a depositary, such as those set out in Articles 7(1) and (3) and 14(1) and (3) of Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), are not covered by that concept.

Summary

Management of mutual funds – Concept of “management” – Depositary duties – Delegation of administrative management tasks

The concept of ‘management of investment funds’ is an autonomous concept of Community law, the content of which cannot be changed by the Member States.

The administration and reporting services of the funds provided by a third party manager are included in the concept of ‘management of mutual funds’ when taken as a whole they form a separate entity and are characteristic and essential for the management of mutual funds.

On the other hand, that concept does not cover services corresponding to the duties of a depositary, such as those referred to in Articles 7(1) and (3) and 14(1) and (3) of Council Directive 85/611/EEC of 20 December 1985 coordinating the laws, regulations and administrative provisions relating to certain undertakings for collective investment in transferable securities (UCITS).

Source