Flashback on ECJ Cases – C-424/11 (Wheels Common Investment Fund Trustees and Others) – An investment fund in which the assets of a pension scheme are not in scope of the concept of ‘mutual investment funds’ (not VAT exempted)

On March 7, 2013, the ECJ issued its decision in the case C-424/11 (Wheels Common Investment Fund Trustees and Others).

Context: Value added tax – Directive 77/388/EEC – Exemption of the management of special investment funds – Scope – Occupational retirement pension schemes

Article in the EU VAT Directive

Artcile 13B(d)(6) of Sixth Council Directive. Article 135(1)(g) of Council Directive 2006/112/EC.

Article 135
1. Member States shall exempt the following transactions:
(g) the management of special investment funds as defined by Member States;

Facts

Wheels Common Investment Fund Trustees Ltd (‘Wheels’) is the trustee of a fund pooling for investment purposes the assets of occupational pension schemes established by the Ford Motor Company in order to meet its obligations under national legislation and collective agreements.
Each of those schemes provides pensions to a category of former employees, calculated by reference to the final salary of the members of the scheme and their length of service with the company. During their employment, the members of the scheme, which is open to all employees but is not compulsory, pay contributions of a fixed amount deducted from their salary. The employer also makes contributions, in an amount sufficient to ensure funding for the remaining cost of providing pension benefits.
At the material time, Capital International Limited provided fund management services to Wheels. In accordance with the provisions of United Kingdom VAT legislation, it charged Wheels VAT on those services and accounted for that VAT to the Commissioners.
In September 2007, after delivery of the judgment in Claverhouse, Capital International Limited claimed repayment from the Commissioners of the VAT in respect of the fund management services which it had supplied, on the ground that those services came within the exemption laid down in Article 135(1)(g) of Directive 2006/112 or Article 13B(d)(6) of the Sixth Directive, depending on the period concerned.
By decision of 2 January 2008, the Commissioners rejected that claim. Wheels thereupon appealed to the First-tier Tribunal (Tax Chamber) against that decision. Whilst, according to the referring tribunal, the services supplied to Wheels are services relating to ‘management’ within the meaning of the exemption laid down in Article 13B(d)(6) of the Sixth Directive and Article 135(1)(g) of Directive 2006/112, there is doubt as to whether the fund held by Wheels is to be classified as a ‘special investment fund’ within the meaning of that exemption.

Questions

1. Are the words “special investment funds” in Article 13B(d)(6) of the Sixth … Directive and Article 135(1)(g) of Directive 2006/112 capable of including (i) an occupational pension scheme established by an employer that is intended to provide pension benefits to employees and/or (ii) a common investment fund in which the assets of several such pension schemes are pooled for investment purposes in circumstances where, in relation to the pension schemes in question:

(a) the pension benefits receivable by a member are defined in advance in the legal documents creating the scheme (by reference to a formula based on the length of the member’s service with the employer and the member’s salary) and not by reference to the value of the scheme assets;

(b) the employer is obliged to make contributions to the scheme;

(c) only employees of the employer can participate in the scheme and obtain pension benefits under it (a participant in the scheme is here referred to as a “member”);

(d) an employee is free to decide whether or not to be a member;

(e) an employee who is a member is normally obliged to make contributions to the scheme based on a percentage of his salary;

(f) the contributions of the employer and the members are pooled by the scheme trustee and are invested (generally in securities) in order to provide a fund out of which the benefits provided for in the scheme are paid to the members;

(g) if the scheme assets are greater than what is required to fund the benefits provided for under the scheme, the trustee of the scheme and/or the employer may, in accordance with the terms of the scheme and relevant provisions of national law, do any one or combination of the following: (i) reduce the employer’s contributions to the scheme; (ii) transfer all or a part of the benefit of the surplus to the employer; (iii) improve the benefits to members under the scheme;

(h) if the scheme assets are less than what is required to fund the benefits provided for under the scheme, the employer is normally obliged to make up the deficit and, if the employer does not, or is unable to do so, the benefits received by members are reduced;

(i) the scheme permits members to make additional voluntary contributions (“AVCs”) which are not held by the scheme but are transferred to a third party for investment and the provision of additional benefits based on the performance of the investment made (such arrangements are not subject to VAT);

(j) members have the right to transfer their accrued benefits under the scheme (valued by reference to the actuarial value of those benefits at the time of transfer) to other pension schemes;

(k) the employer’s and members’ contributions to the scheme are not treated for the purposes of income tax levied by the Member State as income of the members;

(l) pension benefits received by members under the scheme are treated for the purposes of income tax levied by the Member State as income of the members; and

(m) the employer, and not the members of the scheme, bears the cost of charges made for the management of the scheme?

2. In the light of (i) the objective of the exemption in Article 13B(d)(6) of the Sixth … Directive and Article 135(1)(g) of Directive 2006/112, (ii) the principle of fiscal neutrality and (iii) the circumstances set out in Question 1 above:

(a) is a Member State entitled to define, in national law, the funds that fall within the concept of “special investment funds” in such a way as to exclude funds of the type referred to in Question 1 above while including collective investment undertakings as defined in [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) (OJ 1985 L 375, p. 3), as amended by Directive 2001/108/EC of the European Parliament and of the Council of 21 January 2002 (OJ 2002 L 41, p. 35) (“the UCITS Directive”)],

(b) to what extent (if at all) are the following relevant to the question whether or not a fund of the type referred to in Question 1 above is to be identified by a Member State in its national law as a “special investment fund”:

(i) the features of the fund (set out in Question 1 above);

(ii) the degree to which the fund is “similar to and thus in competition with” investment vehicles that have already been identified by the Member State as “special investment funds”?

3. If in answer to Question 2(b)(ii) above it is relevant to determine the degree to which the fund is “similar to and thus in competition with” investment vehicles that have already been identified by the Member State as “special investment funds”, is it necessary to consider the existence or extent of “competition” between the fund in question and those other investment vehicles as a separate question from the question of “similarity”?

AG Opinion

None

Decision

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 and Article 135(1)(g) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that an investment fund pooling the assets of a retirement pension scheme is not a ‘special investment fund’ within the meaning of those provisions, management of which may be exempted from value added tax in the light of the objective of those directives and the principle of fiscal neutrality, where the members of the scheme do not bear the risk arising from the management of the fund and the contributions which the employer pays into the scheme are a means by which he complies with his legal obligations towards his employees.

Personal comments/VATupdate

An investment fund in which the assets of a pension scheme are pooled does not come within the scope of the concept of ‘mutual investment funds’, the management of which, in view of the purpose of those directives and the principle of fiscal neutrality, may be exempt from VAT since the members do not bear the risk associated with the management of that fund and the employer’s contributions to the pension scheme are a means for him to fulfill his legal obligations towards his employees.

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