Statutory references: Value Added Tax Act § 11-3, § 3-30 second paragraph, § 3-6 first paragraph letter d

2. Document list

[…]

3. The case relationship

In its report on the case, the Tax Office has §13-6 fourth paragraph of the Tax Administration Act states the following about the case:

“A was founded in 1997 and is registered in the Enhetsregisteret with business code 66 300 Fund management services as the main industry. The company is domiciled in [city].

The company’s purpose is “Fund management”.

The company is jointly registered with org. No. […] B as mother in the joint registration.

During the control period, A has purchased services from C (C) and D (D).

A book audit was held at A (A) in the period dd.mm. 2017 – dd.mm. 2018. Report after the inspection follows as appendix 1. The inspection was based on random samples and limited to the area of ​​purchase of services from abroad. The inspection revealed that the company has acquired services that can be delivered remotely from abroad that have not been taxed and reported in accordance with mval §§ 3-30 and 11-3.

Reference is made to the book inspection report section 7.2 where reference is made to a letter from A where it appears that the purchases from C concern licenses for use in administration. C supplies various technical management functions for use in the asset management business, a portfolio module, an order management system and a tool regarding compliance with rules and frameworks. The purchases from D concern “D [product 1]” which provides functions such as basis and sub-documentation for use in the business. This can produce historical data and statistics and provides A with a basis for ongoing management decisions. It is pointed out that the services are central to analyzes of developments in the market and thus a central factor in decisions that are made. 

The tax office found that all the conditions in mval § 3-30, subsections 1 and 2 were met (the acquired services were remotely deliverable by their nature, they were subject to tax on domestic turnover and the buyer was considered to meet the requirements to be a trader). A was in a letter of dd.mm. 2018, cf. appendix 3, notified of the recalculation of outgoing value added tax based on the purchase of remote services from abroad with NOK 3,363,924.

In comments to notice of reply dated dd.mm. 2018 from E Advokatfirma AS (E), cf. appendix 4, it appears that A does not agree with the tax office’s understanding of the VAT exemption for financial services in mval § 3-6. It is summarized that the services provided by C in the period 2014 – 2016 constitute central parts of A’s ongoing management activities. It appears that from the second half of 2017, C has provided additional services to A. This applies to services consisting of the modules [module 1], [module 2] and [module 3]. These are services that A has previously acquired from G, and for which G has invoiced without VAT.

The tax office took dd.mm. 2018 decision on recalculation of outgoing VAT, cf. appendix 5. In the decision, the tax office pointed out that the salient point is whether the services from C and D are subject to tax when sold in Norway. The other conditions for tax liability, that the services can be delivered remotely and that A is a trading company, are met.

After reviewing relevant legal sources for the assessment of whether the services provided by C and D fall under the exception in mval § 3-6, the tax office went into the decision in more detail about the services and what these included. […]»

The taxpayer has requested in comments to the submission that the taxpayer’s representation of the facts be included in its entirety in the submission. Taxpayers write about the fact in a letter of appeal dated dd.mm. 2018:

« 2. The factual side of the matter

2.1 About the business in A

In the following, we will explain in detail which obligations are included if you are to conduct “management of securities funds”, cf. § 3-6 letter f.

In order to be able to act as a manager of securities funds, you need a license according to the Securities Funds Act 

Section 2-1 (1). Once the license has been received, and when carrying out the business, a number of regulatory requirements come into play – primarily by the Securities Fund Act (vpfl.), but also by the Securities Trading Act (vphl.), with regulations.

The management of a mutual fund itself, i.e. the manager’s choice of which securities are to be bought and sold on behalf of the fund, is of course an important part of a management company’s operations. At the same time, there are several areas that are just as central;

• the fund’s transactions must be settled and secured,
• the unit owners must be entered in the fund’s unit owner register,
• The unit owners’ daily deposits and withdrawals must take place according to specific procedures, and
• the shares must, in order to be traded at all, be distributed through various channels.

Management of a securities fund must therefore take place in an interaction between the management company’s various functions, where they are mutually dependent on each other to meet all regulatory requirements. In contrast to the past, where large parts of a management business were based on manual processes, today the entire business “ecosystem” is made up of IT systems. These systems are not generic, but on the other hand specially developed so that a fund manager can meet all regulatory requirements when carrying out the business. It is therefore not possible to operate “management of securities funds”, cf. § 3-6 (f), without such systems having been established.

Below is an overview that shows the connection between the various modules that A uses today (and which were purchased from C) and which corresponding modules were previously purchased from G. G/H [ footnote: Unit owner services that were previously provided by G are now separated into a separate company, H] defines and invoices its services as exempt from tax, cf. mval section 3-6 letter f. All systems are essential to be able to “manage securities funds”.

Table

[…]

In the following, we will add some comments to the background for the individual modules being implemented by A:

The unit owner register ( [module 4 ) and « [module 3] – see figure no. 1

Every management company is obliged to keep a unit owner register, i.e. a register of who are unit owners in the fund, cf. vpfl. Section 4-10. Entry in the unit owner register provides legal protection for the unit owner, both with regard to ownership of the units and in relation to receiving dividends, participating in unit owner meetings, etc. The unit owner register is therefore a very central part of the business of a fund manager.

Until 2017, A’s unit owner register was registered in G – as is known without the addition of VAT. From 2017, A took over the register keeping of the unit owner register itself, and the register was moved to the module [module 4]. Although the platform was thereby changed, the connection to securities fund management is just as strong.

[Module 3] handles tax reporting both to public authorities and customers. The data base is taken from [module 4]. The module prepares all reports, and also mainly takes care of the submission of the reports (however, A itself is responsible for the submission of certain reports, including FATCA reports).

The portfolio system ( C – [module 4]) – see figure no. 2

A management company is obliged, among other things, according to the securities fund regulations § 2-6 (3) no. 4 cf. § 2-16 to have “suitable electronic systems that ensure timely and correct registration of each transaction”, as well as according to § 2-30 to have “routines and arrangements” which ensure quick, correct and efficient execution of transactions on behalf of the funds. When buying and selling securities in the funds, the managers register orders (and cancellations) in the order handling system [module 5]. Information about the trade is transferred from [module 5] to [module 4]. The registration in [module 5] also forms the basis for payment and settlement instructions, which are sent to the funds’ custodian bank.

Furthermore, you are naturally obliged to keep the funds of the individual portfolios separate from each other. For a management company, it is therefore absolutely required to have an efficient and secure portfolio system so that management can take place in accordance with all regulatory requirements. This is the reason why A has adopted [module 4] as a portfolio system.

At the same time, according to Section 2-11 of the Investment Funds Act, one is obliged to have “internal control methods” which ensure that the management of the fund takes place in accordance with the fund’s articles of association and the Investment Funds Act’s investment rules (i.e. Chapter 6 of the Act). This is the reason why C’s system solution also contains the module [module 6], where all rules – both according to the articles of association and the law – are entered, and which ensures that the administrator is notified if an intended trade will lead to a breach of one or more rules.

Trading and reporting solution ( [module 2] ) In the Order system ( [module 1] ) – see figure no. 3 and 4

A securities fund is defined as an “independent mass of assets created by capital contributions from an indefinite circle of persons against the issue of shares in the fund”, cf. vpfl. Section 1-2 (1) no. 1. This implies that the existence of a securities fund depends on the investors being willing to, and having effective access to, paying money into the fund – in exchange for shares being issued. Without such deposits, there will be no funds to manage. The unit owners’ ability to buy and sell units is therefore the engine of a management company’s business, and a number of requirements have therefore been laid down in relation to this.

The Securities Act §§ 4-9 and 4-12 stipulate the management company’s duty to let unit owners subscribe and redeem their shares, and according to § 2-16 of the Securities Fund Regulations, a number of matters are stated which must be registered with each subscription and redemption request.

A fund management company is therefore dependent on having various channels through which the fund shares can be subscribed to and redeemed in a legal manner. A’s solution for this is [module 2] a solution that can be used by both the customer and the adviser to register the purchase and sale of fund units.

At the same time, [module 2] also functions as a reporting solution. The Mutual Funds Act places several requirements on a management company with regard to informing the unit owners, among other things, about their transactions and their holdings, cf. for example § 8-4 of the Mutual Funds Regulations. A is thus obliged to have such a solution.

The order system ([module 1]) functions as a link between [module 2] and the unit owner register, and is a crucial system for the subscription and redemption requirements to be handled correctly.

Summary

As a backdrop for the further explanation, it is absolutely essential to understand the various processes involved in “management of mutual funds”, cf. §3-6 letter f, and why they have been implemented. The processes/systems have been created as a result of regulatory requirements , they are mutually dependent on each other, and they are all crucial to being able to manage a securities fund in line with the requirements.

2.2 The services provided by D

A has an agreement with D regarding the delivery of the service “D [product 1]”. D [product 1] is a service with functions that provide a basis and underlying documentation for use by A in their business, and the service can, among other things, is used to produce historical and financial data and statistics.

The functions in the D Application give A the opportunity to retrieve and analyze information about potential investments. Consequently, the information and analysis provided by D is used as background information and the basis for the investments A makes on behalf of its customers. Through the service from D, A can i.a. retrieve reports that provide information on the stock market in various geographical areas and sectors, as well as manage their stock exposure based on various pricing models in the system. This information is central to A’s analysis of developments in the market, and thus constitutes a central factor in the decisions A makes in its ongoing management activities.

In decision of dd.mm. 2018 (appendix 5), the tax office writes the following about the facts of the case:

“The tax office will go into what services have actually been provided by C and D. From appendix 3 to the report, letter of dd.mm. 2017 from A to Tax x with attachments, appears “Order Schedule #1 C «[product 2]” dated dd.mm. 2011. This applies to services provided throughout the control period. It appears from the document’s introduction that the document serves as ” confirmation of Licensee’s order to license the following Subscription (the “Subscription” and receive the services during the term, as defined below, and to engage C for the additional Services, if any, for the fees described.The delivery method is described as C [product 2]. This means that it is C that operates the server that A uses. The document entitles A to […] concurrent user licenses for the software “[module 4]” and […] concurrent user licenses for the software [module 5]. 1 license is also given to various software such as [module 6], [module 7], [module 8], [module 9], [module 10] inventory reports etc. It appears that the software can only be used for a specified period for the specified number of users. The document obliges C to provide maintenance and training services in connection with the software.

From the website of C, the following description of [module 4] and [module 5] appears:

“[quote homepage]

From the agreement of dd.mm. 2014 with D states that this is a license agreement. It gives A the right to 1 license to D [product 1] at an annual price of NOK 98,000. D [product 1] is a database that can be used to extract and analyze information about potential investments.

From the second half of 2017, C has supplied additional services to A. A previously acquired these services from G, who invoiced the services without VAT. This applies to the services [module 1] which is an order management system used to optimize and automate the processing of transactions carried out on behalf of the customers, the service [module 2] which safeguards the customers’ statutory and contractual right to information about stock, transactions, annual statement etc. as well as gives the customer the opportunity to carry out fund transactions themselves and the service [module 3] which carries out tax reporting to public authorities and customers.”

[…]

The Tax Office will then assess the services purchased from the second half of 2017 from C. The Tax Office has in an e-mail dated dd.mm. 2018 asked to be sent the agreement regarding the purchase. The agreement has been received as an attachment to an e-mail by dd.mm. 2018. The services in question are the modules [module 1], [module 2] and the service [module 3]. The agreement dated dd.mm. 2016 regarding the services [module 1] and [module 3] is named “Order Schedule for Software Hosting and Outsourcing Services” . It appears from the introduction of the agreement that “This document serves as firm confirmation of Licensee`s order to license the following software, maintenance and services (the “Subscription”) and receive the Maintenance services during the Term, as defined below, and to engage C for the additional services, if any , for the fees described.”  The software for which a license is granted follows in a table layout, including [module 1] and [module 3]. It appears that the software can be used in the period from dd.mm. 2017 to dd.mm. 2020 of the number of users that appears from the table layout. The number of users is unlimited for [module 1], while for [module 1] online it is limited to […]. For the other software it is limited to one user. The service is delivered Managed Hosted, which means that the software is on a server with C, who has the technical responsibility.

Annex 2 is the agreement dated dd.mm. 2017 and the description of the software [module 2] The same appears here as for [module 1] with some exceptions. The agreement is named “Order Schedule for Software”, the number of users is limited to […] and the delivery method is “Electronic”. The agreement grants a software license in the same way as for [module 1].

[Module 1] is described as follows on the homepages of C: [citation homepage]

On […]’s website, [module 2] is described as follows as far as [module 2] is concerned :
[quote website]

The tax office made a decision on the recalculation of outgoing value added tax dd.mm. 2018, cf. Appendix 5.

The Tax Office’s decision was appealed in a letter dated dd.mm. 2018 from E, cf. appendix 6.

The Tax Office’s explanation of the case was sent to the secretariat dd.mm. together with the case documents. 2019.

The secretariat sent a draft recommendation to the taxpayer’s representative dd.mm. 2021, and received comments on the appointment of the taxpayer’s representative dd.mm. 2021, and then additional notes dd.mm. 2021.

As a result of legal developments in the area, the secretariat decided to rework the proposal and sent drafts of the proposal for re-inspection to taxable persons dd.mm. 2022.

The secretariat received comments on the revised proposal dated mm. 2022. In a notice letter, the taxpayer asked for a meeting with the secretariat in order to be able to give a more in-depth explanation of the facts of the case, including explaining how the purchased services from C are used in the company.

Taxpayers and the secretariat then held a digital meeting dd.mm. 2022 where representatives from taxpayers, as well as taxpayers’ proxies, participated. The agenda for the meeting was to clarify which functions the purchased services from C have in the taxable person’s business with the management of investment funds.

The secretariat then received an e-mail from the taxpayer’s representative dd.mm. 2022 where further comments were attached to the case (appendix 17), as well as an attached power point presentation from a meeting where the company reviewed the various modules purchased by C (appendix 16).

4. Taxpayer’s declarations

4.1. Complaint by dd.mm. 2018

Taxpayers appealed the tax office’s decision in writing dated dd.mm. 2018.

Taxpayers have notices of dd.mm. 2021 requested that the complaint be included in the setting in its entirety. From complaint of dd.mm. 2018 hits:

« 3 The legal situation

3.1 Introduction

Pursuant to mval § 3-30 first cf. second paragraph, VAT must be calculated on remotely delivered services that are purchased outside the VAT area, if the recipient is a business resident in the VAT area and the service is subject to VAT on turnover in the VAT area.

It is clear that the services in question are to be regarded as services that can be delivered remotely, and that A is a business resident in Norway. The decisive factor is whether the services A has purchased from foreign suppliers would have been liable to tax when traded in Norway, or whether the services fall under the exception rules for financial activities in mval section 3-6.

Pursuant to mval § 3-6, turnover of financial services is exempt from the law and thus from VAT liability. The provision’s letters a to g list various financial services that are covered by the exception rule, including “management of mutual funds” and “management of investment companies” are expressly mentioned in the provision’s letters f and g. Active management (discretionary management) is exempt according to mval section 3 -6 letter e.

The enumeration in mval § 3-6 is not exhaustive, cf. Ot. prp. no. 2 (2000-2001) page 193 where the legislator also states that the choice of wording is “intended to make room for new services, among other things as a result of changes in the market structure.”

A’s management activities are covered in their entirety by the provision. A’s deliveries consisting of management of securities funds are covered by section 3-6 letter f, while the active management is covered by section 3-6 letter e.

The decisive question is whether services A has purchased from foreign suppliers are covered by the VAT exemption in § 3-6.

With regard to the legal understanding of the exception rules in § 3-6, reference is made to the review in our letter of dd.mm. 2018 with comments to the post-calculation notice. There is also a need to attach some comments to the tax office’s interpretation of relevant decisions from the European Court of Justice, as well as to the explanation of Norwegian administrative practice.

3.2 Comments on legal basis and practice from the EU Court of Justice

The Tax Office begins its legal assessment with the following literal interpretation of the term management:

“A purely literal interpretation of the term “management” leads the mind towards services that a manager/a management company undertakes in connection with active portfolio management with investment authority, of funds, typically services relating to analyses, purchase and sale of shares, handling of shares, etc.”

We would like to point out that this is obviously a subjective interpretation of the wording, and that with an objective interpretation it must be assumed that the concept of management can encompass a much larger range of activities. In this case, relevant examples are the registration of trades, the monitoring of liquidity changes and the preparation of statutory reports, as well as tax reporting.

The tax office then carries out a further assessment of the management concepts in mval sections 3-6 letters f and g respectively, seen in the light of the Ministry of Finance’s interpretive statement of 15 June 2001. With regard to the management of mutual funds according to previous mval section 5 b (1) letter f shows the tax office, among other things, to the fact that it appears from the interpretative statement that such management “is defined according to the Securities Funds Act § 1-2, third paragraph, as management of securities funds, including the sale and redemption of shares in the fund and the purchase and sale of securities for the fund” and that “the fund manager has general authority to decide, and not just contribute to carrying out, transactions concerning the placement of the fund’s capital within the framework set in the authority”.

When it comes to management of the investment company, the tax office cites the interpretation statement, among other things. that “management of investment companies shall be exempted to the extent that this is an activity that can be compared to management that takes place in securities funds”.

The Tax Office also cites significant parts of the interpretation statement related to subcontractor services, including the following section related to the EU Court’s decision C-2/95 (SDC):

“Otherwise, the Danish court settlement sets out as a rule of law that services from subcontractors will be exempt from duty if they are special, specific and essential for a duty-free financial service. In the ministry’s opinion, the extent of the demarcation must be assessed concretely for the individual service and the closer demarcation will therefore have to take place in practice . The ministry considers that, in this connection, great emphasis must be placed on the practice and development of similar exemptions in Sweden and Denmark” (our emphasis)

The interpretation opinion of 15 June 2001 was issued in the wake of the VAT reform, and was at this time central to the understanding of the regulations. However, as can be seen from the interpretative statement, it was assumed that the delimitation would be developed in practice. The guidelines set out in the interpretative statement must be read in light of this.

The subsequent legal development in the EU has also led to an expansion of the term management in terms of subcontractor services compared to the legal situation in 2001. In case C-169/04 (Abbey National), the EU Court of Justice took a position on, among other things, the question of whether the term “management of investment funds” included administrative and accounting services performed by a third-party administrator for a fund. In the judgment, the Court of Justice of the EU followed the assessment theme established in the SDC case, and stated the following in paragraphs 70-71:

In order to qualify as exempt transactions as referred to in Article 13, point B, letter d), no. 6 of the Sixth Directive, the administrative and accounting services provided by a third-party administrator must, however, be seen as a separate whole, where they fulfill specific and essential functions for a service as described in said No. 6(cf. in this regard as regards the Sixth Directive’s Article 13, point B, titre d), no. 5, the SOC judgment, paragraph 66, and the CSC Financial Services judgment, paragraph 25). The services provided must therefore relate to the specific and essential elements of investment associations. The mere delivery of an actual or technical service, such as e.g. that a data processing system is made available is not covered by the Sixth Directive’s Article 13, point B, titre d), no. 6 (cf. in this direction with regard to Article 13, point B, titre d), no. 3, SOC judgment, paragraph 66).” (our emphasis)

The Tax Office has correctly pointed out that the judgment expanded the current understanding of what was considered under Norwegian law to be management of investment companies and mutual funds. The Tax Office further writes that the judgment has subsequently been interpreted to mean that “in cases of subcontracting, it must be a matter of a ‘collection of services’, which seen as a whole, and under specific conditions can be considered ‘administration’ in itself, in contrast to outsourcing of individual service types’. The Tax Office points out that “(f)or subcontractors’ delivery to funds of otherwise taxable services such as information and analysis services, audit services, legal services, accounting services, unit administration etc. to funds is to be considered exempt from “management”, they must therefore be delivered as a total package solution”.

We do not agree with this interpretation of the judgment. The fact that the judgment sets out as a requirement that the services must constitute a “separate whole” does not mean that a combined package solution must be delivered. The judgment’s premises are also not concrete as regards which forms of administrative and accounting services must be included in a separate unit in order to be covered by the exception rules.

In all cases, the requirement that it must be a “package solution” of services was refuted when the EU Court of Justice in the GfBk judgment (C-275/11), handed down on 7 March 2013, ruled on whether individual service types can also be covered of the exception. In concrete terms, the case dealt with advisory and information services provided to capital investment companies. The European Court of Justice confirms the assessment theme as it was formulated in the Abbey National judgment. It is further stated in premise 23 that:

“… in order to determine whether the services relating to advice on investment in securities, which are provided by a third party to a capital investment company, are covered by the concept of “management of mutual funds” for the purposes of Article 13, point B of the Sixth Directive, titra d), no. 6), stipulated exemption, as stated by the general counsel/attorney in points 27-31 of the proposed decision, it must be examined whether the service provided by a third party regarding advice on investment in securities has a close connection with the business that is characteristic of a capital investment company, so that it fulfills the specific and essential functions for the management of an investment association . (our emphasis)

In premise 28, the EU Court further states:

“Furthermore, according to the wording of the Sixth Directive, Article 13, point B, titre d), no. 6), in principle it is not excluded that management of investment associations can be considered to consist of several special services, which can thus be covered by the term “management of investment trusts” referred to in this provision, and which is thus covered by the exemption provided for herein, even if they are provided by a third-party administrator (Abbey National judgment, paragraph 67), provided that each of the aforementioned services fulfills the specific and essential functions for the management of an investment association … » (our emphasis)

With regard to the understanding of the term “close connection”, reference is made to the Advocate General’s proposal for a decision, premise 32. The Advocate General states that the services must be identified as services specific to an investment fund, and which thereby make it stand out from other economic activities. A distinction must be made between services that are delivered to all companies regardless of industry, so-called neutral or fungible services, and services that are specific and essential for mutual funds and their management:

 “Technical assistance regarding IT equipment or even – as some Member States and the Commission pointed out during the hearing – cleaning services can, on the other hand, be provided to both an administration company for an investment association and a construction company, without it being claimed to be a service that is specific to any of these industries. In other words, these are neutral or fungible services in terms of content, since they can be delivered to any company, regardless of what it deals with . (our emphasis)

As examples of what are considered services that fall under the VAT exemption for financial services due to the fact that the services are precisely distinct, specific and essential for the administrative service, the Court of Justice of the European Union shows with reference to the Abbey National judgment that

“the term “management” of an investment association does not only include investment management, which involves the selection and disposal of the managed assets, but also administrative and accounting services, such as calculation of profits and the price of other shares or shares, assessments of assets, accounting, preparation of declarations with a view to the distribution of profits, delivery of information and documentation for use in the periodic accounts and tax returns, statistical reports and declarations of VAT as well as preparation of profit forecasts. It is therefore irrelevant that, just as in the main case, it was the responsibility of the capital investment company in question to implement the recommendations on the purchase and sale of assets, which were made by GfBk, after having checked that they were in accordance with the investment limits.” (our emphasis)

The starting point in EU law is, based on the reviewed decisions from the EU Court of Justice, that services provided by subcontractors for use by management companies in the management of mutual funds and investment companies can be covered by the exemption for management services. This applies regardless of whether it is a comprehensive package of services or individual services. However, the prerequisite for the services to be exempt is that the services are special, essential and specific to the administration services.

3.3 Norwegian administrative practice

No judgment has been handed down in Norway that directly addresses the question of whether subcontractor services are covered by mval § 3-6. However, following the interpretation statement of 15 June 2001 and the judgments from the European Court of Justice, the tax authorities have issued several statements, including a joint letter of 16 May 2013, a circular of 8 December 2016 and a statement of principle of 17 November 2017. There are also some publicly available single decision.

In our reply of […] 2018, statements and practices are reviewed in detail. We will limit ourselves here to commenting on the tax office’s explanation of administrative practice in the decision.

In the decision, the Tax Office has referred to the VAT handbook (14th edition 2018) point 3.6.9, which refers to a binding advance statement of 31 January 2007. In the BFU, the Tax Directorate came to the conclusion that two “packages” of administration services were covered by the exception provision for fund management in mval (1969). One package concerned services related to securities administration, including settlement, reconciliation of cash and custody, daily registration of market value, etc. The second package consisted of services associated with the unit owner register, including services with verification and implementation of payment, handling of dividends, including instructing payments, standard reporting and system management.

The VAT handbook also mentions an unpublished BFU dated 22 December 2015 in which the Tax Directorate concluded that services such as account administration, reporting and account servicing which were delivered in connection with the management of securities funds and investment companies were covered by the exception rules, provided that the services were sold together. The Tax Office writes on page 20 of the decision that “(d) is the basis for the statement that services that A purchases from C, including [module 4], [module 5], [module 1] and [module 11] are expected to be sold from C with VAT”.

In addition, it should be noted that the duty to pay tax on the services the company in question purchased from C was not a topic in the BFU, and that the tax office neither took a position on nor referred to this factual information from the submitter. This is in contrast to Skatt y’s statement of 15 April 2016, where the tax office took a position on the tax treatment of IT services and administrative services purchased from subcontractors – and concluded that these should be considered exempt financial services. This statement is described in more detail in our reply of dd.mm. 2018.

In our view, the unpublished BFU of 22 December 2015 has no legal source weight or significance for the question in the present case.

Finally, the tax office refers to the principle statement of 17 November 2017. About this, the tax office writes the following:

“The tax office is aware that individual deliveries have in a few cases been accepted as being included as “management” according to the Mval. § 3-6 letter f) and g). Against this background, the Directorate of Taxation came up with a joint letter on 14 November 2017 in which the Directorate draws the lines back to the first BFU that was issued after the Abbey judgment, and it is concluded that these still express the agency’s guidelines for the interpretation of the term management.

This appears to be a slightly nuanced rendering of the 2017 statement. It appears from the statement that the reason for this decision was lack of clarity regarding what the tax authority’s guidelines and practice were in this area. The Tax Directorate also writes in the statement that even if the starting point according to the Abbey National judgment is that a “collection of services” must be required, within the framework of the GfBk judgment there will be room to consider individual types of services covered by the exception when closer conditions are met.

In conclusion, we would like to refer to the Oslo district court’s judgment of 16 August 2017, where a decision was made as to whether the business run by Gjensidige Pensjonsforsikring AS could be considered a fund/investment company in accordance with mval section 3-6 letters f and g.

In the previous administration process, the tax authorities had decided whether services from subcontractors could be considered exempt administration services. Reference is made to the description included in the decision of the Complaints Board for Value Added Tax (KMVA-2016-8691AA), where it appears that the agreement with the subcontractor was called “Agreement on IT operation, maintenance and development”. The agreement included, among other things, a “basic and product system, as well as functionality for deposit, payout, policy administration, claims administration, customer administration, integration and security”. The basic system, on the other hand, included functions related to investments, including execution of purchase and sale orders for shares as a result of payment, payment or fund switching/rebalancing.

The agreement also included the delivery of a “Customer account/Share register”, which is described as follows:

“This is a register that keeps the customer’s payments in order and defines the company’s obligation towards the individual customer. The register shows shares per fund and insurance rights per customer for Mde company/employees and private individuals. Company 4 [the subcontractor] is responsible for this register. The customer logs into the register via the company’s internet portal, which retrieves the information from Company 4”

The case appears from the descriptions to have significant similarities with our case. It is therefore worth noting that the tax authorities, both in connection with the processing of the complaint and later before the courts after an assessment, based the company’s view that the subcontractor services could be considered administrative services in accordance with mval section 3-6 letters f and g.

4 Subsumption

4.1 Assessment of the services provided by C in the period 2014 – mid-2017

In light of the explanation in point 3, the central question is whether the solutions C delivers taken as a whole constitute a separate whole that is significant and specific for the management activities of A, alternatively whether the services are to be regarded as individual services that have a close connection with the company’s management activities. A distinction must be made between actual and technical services, cf. the Abbey National judgment, and neutral/fungible services that can be delivered to any business, cf. the GfBk judgment.

At the outset, it is noted that we do not disagree that the delivery of pure software solutions in isolation can be considered a technical service provision, cf. the statement in the Abbey National judgment that a data processing system that is made available is not covered by the concept of administration in the EU. In this context, it is pointed out that C offers a wide range of delivery models, where the service offer at one end includes the sale of rights to use individual C modules on its own server, while at the other end it offers comprehensive management solutions delivered via a “hosting” function. A uses the “hosting” solution, and it is thus C that operates the server A uses. By virtue of this, C has functional responsibility for the content of the various modules included in the solution.

A has used the [C module 4] modules [module 4], [module 5] and [module 6] throughout the control period. As described in point 2.1, the modules together form a portfolio system. As described in point 2.1. shows the portfolio system ensures that all transactions on behalf of the funds are carried out in accordance with all regulatory requirements.

The portfolio system is also specially adapted to A’s business. Examples include:

• the calculation of return commission to the distributors,
• the cost calculation per individual customer,
• a number of factors in [module 1] in relation to how orders are processed and calculated,
• the calculation of the funds’ success fee,
• the calculation of the management fee for active management, etc.

These adaptations mean that competing businesses will not be able to use the system as it is set up.

As described in our reply of dd.mm. 2018 there is reason to point out that the portfolio system has a number of functions that coincide with the administrative functions listed in the 2016 circular, including value and price determinations, control of compliance with legislation, updating of the participant register and registration.

The following examples show how closely integrated C’s services are in the management of the funds:

According to Section 6-6 of the Norwegian Securities Act, a fund has special restrictions on how the fund’s funds are to be invested.

• In [module 6], parameters have been set to ensure that these rules are observed. The program therefore ensures that A follows the rules in the Securities Trading Act, and alerts if one moves outside the mandate’s limits.
• A is paid based on committed capital in the funds. Based on the daily valuation of the fund’s assets, which also happens in C’s modules, the management fee is calculated as part of C’s “on-demand” solution.
• [module 4] produces a basis that is used to fulfill the note requirements for the funds’ annual accounts, for example calculations of the securities portfolio’s turnover rate, commission charged in the income year and the funds’ settlement rates.
• The basis for calculating the taxable profit to the unitholders of the interest funds in question, as well as the distribution per share at the end of the year, is generated in [module 4].

• In [module 5], A places orders with the brokers for the execution of the financial transactions in the funds. The module interacts with the [module 4] module for settlement and registration at the transaction level.

In its assessment, the Tax Office seems to place significant emphasis on the fact that the agreements between A and C imply that A pays C for the use of license rights.

In addition, it is noted that license rights will often mean that the user is given a right to use a licensed and standardized software on their own server, e.g. Microsoft Office. However, the contractual relationship between A and C is of a different nature, firstly as C, through the hosting function, operates the server A uses. Secondly, the tight integration between the various […] modules also means that a more complete service is delivered than what a license right to a software normally provides. The Tax Office seems to misunderstand the content of the modules C delivers when it is stated that “(d)these appear as licenses for the use of platforms where information can be extracted for use in administrative activities”. As described above, the modules form a portfolio system, where central parts of the management activities are carried out.

The fact that the services are referred to in the agreement as “software” and “portfolio management technology” does not deprive the solution of the characteristics of a management system either. The decisive factor must in all cases be which services are performed, not how they are performed. That significant parts of the tasks related to fund management, which were previously carried out manually by the managers, are now carried out electronically is a natural part of the technological development. As technology has developed, it is both appropriate and in many cases required that these tasks are now carried out electronically. However, it is not a question of tasks that can be performed by standardized software. The portfolio system C offers is clearly more comprehensive and specifically geared towards fund management than what can be offered through standard software.

By describing the services as “pure software solutions”, it also appears that the tax office assumes that all tasks carried out electronically must be equated with technical services. Such an interpretation will in practice mean that more and more services will be considered subject to tax as the technology develops. We can neither see that this was the legislator’s intention nor that case law provides a basis for such an interpretation.

Initially, it must be assumed that the tax regulations must be technology neutral. However, technological developments have led to a number of financial regulatory requirements where fund managers are required to process their management activities electronically, so that there is no longer an opportunity to carry out these tasks manually. As fund managers are required to process electronically, it will also be natural to use subcontractors who carry out management tasks using electronic systems.

Reference is made here to the legislator’s statement in Ot. prp. no. 2 (2000-2001) page 193 that the enumeration in Mval § 3-6 is “intended to provide room for new services, among other things as a result of changes in the market structure.” The above-mentioned conditions have led to a clear change in the market structure for fund management services over two decades, which must be taken into account in the interpretation of the rule.

We find reason to point out that the European Court of Justice both in the Abbey National judgment and in the GfBk judgment emphasizes that the background for the management of investment companies being exempt from VAT is that investment activity itself is exempt, and that the exemption for management ensures tax neutrality in the choice between direct investment and investment through a manager. Obligation to charge fees for management services performed by subcontractors will violate the principle of neutrality, as the final product will be more expensive.

We also agree that services consisting of training in the use of the systems and maintenance services in isolation are chargeable. In this context, however, it is natural to treat these services as sub-services to the main service – delivery of an administration system – and thus these services must also be considered exempt from VAT.

If the tax office is still of the opinion that a requirement can be made that a “package solution” of services must be delivered, and that the management system C offers does not constitute such a package solution, the services will in any case be exempt as individual services cf. the GfBk judgment . Reference is made to C’s website where it appears that the company’s service offering is specifically aimed at the financial sector, preferably within portfolio management and securities trading. The services C delivers are indeed based on software, but which have been developed specifically with portfolio management and securities trading in mind, and thus cannot be considered neutral or fungible services, such as cleaning services (which are highlighted as an example in the GfBk judgment).

From the description in point 2.1 as well as the discussion in this point, it appears that the services C provides take care of central functions in A’s business. The services C delivers are not only considered necessary for the administration activities, but also represent service elements and core functions in the administration. On this background, it is maintained that the services C has provided throughout the control period must be considered exempted management services.

In this context, it is also necessary to refer to Skatt y’s statement of 15 April 2016, where the tax office concluded that services similar to the services C provides were covered by the exemption in VAT. § 3-6 letter f. Although a concrete assessment of the services received must be made in each individual case, the understanding that is based on the statement is, in our opinion, in accordance with the regulations.

We are aware that the regulations have been applied somewhat differently between the tax offices. This differential treatment leads to distortion of competition and is naturally perceived as unfortunate by the traders, and has resulted in two inquiries from the Verdipapirfondenes Forening (VFF) to the Tax Directorate, dated respectively 13 December 2016 and 14 June 2018. The letters remain unanswered as of dd.

4.2 Assessment of the services provided by C from mid-2017

From mid-2017, C has provided additional services to A in the form of an extended version of [module 4], the order module [module 1], the customer solution A […] ([module 2] and the service [module 3].

In the decision, the Tax Office makes an assessment of these services which is closely linked to wording in the agreements regarding these services, and comes to the conclusion that all modules must be considered a license or access to software.

With regard to [module 1] and [module 3], A and C have entered into the “Order Schedule for Software Hosting and Outsourcing Services” agreement. Reference is made to the explanation above related to agreement wording versus real content. As described in point 2.1, [module 1] together with the extended [module 4] module constitute a full-fledged system for handling the unit owner register and customer settlements. In our view, it appears from the description of [module 1] on C’s website – reproduced by the tax office on page 20 of the decision – that [module 1] is not limited to a pure software solution. In [module 1], services are performed which, if carried out manually, would clearly fall within the concept of management.

Reference is also made to the unpublished BFU of 31 January 2007, where it is stated that services associated with unit owner registers are covered by the exemption provisions.

As regards [module 3], the agreement contains a detailed description of what this service entails, broadly divided into data validation, reporting and project management. The entire reporting process towards clients and the tax authorities is carried out in the module. The project management offer includes regular meetings and a final report after completing the annual reporting.

A Investor services [module 2] are regulated in a separate agreement called “Order Schedule for Software”. In the same way as for [module 1], the wording of the agreement cannot be given decisive weight. Reference is made to point 2.1 above, where it is stated that the module functions both as a solution that customers and advisers can use to register the purchase and sale of fund units, and as a reporting solution.

It is noted that these are services which A has previously purchased from G, and which G invoiced without VAT. To this end, the tax office states on page 20 of the decision that the individual service must be assessed independently based on the nature of the individual service. We do not disagree with this premise. It appears, however, that the services G/H supplies are essentially the same as the unit owner administration services that A now procures from C. It is both unfortunate and distorts competition if services procured from a Norwegian supplier are to be invoiced without VAT, while the taxable person is required to calculate the reverse settlement when purchasing equivalent services from a foreign supplier.

The Tax Office points out in the decision that the agreements regulate how many users are granted access to the various modules. In addition, it is noted that in connection with the expansion of the [module 4] module from mid-2017, a third agreement was entered into, which involved upgrading to an unlimited number of users for this module. The background for this was a need for unrestricted access to [module 4] as a result of the further expansion of the collaboration between A and C. The agreement was presented to the tax office in our e-mail of dd.mm.2018, but not commented on in the decision.

The extension of the agreement with C from mid-2017 to include these modules means, in our view, that from this point on, C has to an even greater extent provided services that constitute a comprehensive and separate unit that is specific and essential for the management activities.

In the decision, however, the tax office has come to the conclusion that there will not be a collection of services from mid-2017 either. From what we understand, this is justified by the fact that the services C provides are limited to license rights that give access to a number of programs, where information and analyzes are extracted that give A a basis to work on.

Reference is made here to the explanation in point 3.2 relating to the requirements the Abbey National judgment sets out that the administrative services must constitute a “separate whole”. The Norwegian statements, including the principle statement from 2017, must be read against this background. The explanation above shows that the services taken together clearly satisfy the requirements that can be derived from the legal sources.

With regard to the question of whether the services can be considered as individual services that fall under the exception rules, the tax office states that the services A buys from C are of a completely different nature to what was the case in the GfBk judgment. It has been shown that the services do not result in concrete investment advice and/or recommendations from C’s side.

It is true that the GfBk judgment specifically dealt with advisory and information services provided to capital investment companies. However, reference is made to the quotations from the judgment in point 3.2 above, where it appears that administrative and accounting services may also fall under the concept of management. The judgment cannot therefore be read in such a way that it only applies to the services that the case specifically dealt with. As can be seen above, there is a close connection between the services C delivers and the business A runs, and the services fulfill specific and essential functions for fund management, so that these must be considered to fall within the concept of management.

Against this background, it is maintained that the services C has provided from mid-2017, both assessed in isolation and together with other services provided by C, are to be considered exempt management services.

4.3 Assessment of the services provided by D

As regards the service provided by D, the tax office refers to the submitted license agreement between A and D. In the same way as for the services provided by C, the tax office considers the service provided by D as a pure IT service in the notice. With reference to the agreement between A and D, the tax office assesses that the service is not particularly adapted to the business in A. The tax office points out that this service does not provide concrete advice in relation to investments or the sale of assets either.

We also do not agree here with the understanding of the services that the tax office uses as a basis for the decision, or with the tax office’s application of the legal rules.

The license agreement between A and D gives A access to the service D [product 1]. As mentioned under the description in section 2.2, D [product 1] contains functions that provide a basis and supporting documentation for use by A in their business, and can, among other things, is used to produce historical and financial data and statistics.

The service provided by D is used throughout by A during fund management. It fulfills specific and essential functions for the management activities, and has such a close connection with the management activities that the GfBk judgment establishes as a premise. With regard to the tax office’s assessment that the service does not involve concrete advice relating to investments or the sale of assets, reference is made to the explanation in point 3.2, where it appears that the judgment cannot be understood with such limitations.

It is therefore maintained that there is no basis for recalculating VAT on the purchase of services from D.

4.4 Consequences of the tax office’s decision

When processing the complaint, it is essential to be clear about the consequences of upholding the tax office’s decision.

(i) Erosion of administrative practices related to mval. § 3-6 (f)

Mval. § 3-6 (f) states unequivocally that turnover related to “management of mutual funds” is exempt from tax, and as a “core subject” according to the provision, A’s activities clearly fall under the exception rule. However, the Tax Office’s decision has the consequence that central parts of A’s operations – where it has chosen to use subcontractors – are in reality not granted exemption (with the exception of what appears under point (iii) below).

In other words: It appears that the tax office’s decision undermines administrative practice which dictates that subcontractor services that are special, specific and essential for the administrative activities must be covered by the exception rules.

(ii) Different suppliers are treated differently

H/G’s various services related to fund administration, which are equivalent to those A has purchased from C, cf. below, are accepted to be exempt from duty.

Given that the tax office’s decision is correct, a supplier (H) is thus placed in a special position compared to others (C etc.).

This can hardly be seen other than as pure discrimination, which in turn will have major competitive implications. If the decision is upheld, both A and other management companies will have to consider moving the administration of the funds back to G. This is seen as very irrational and would have to do this solely for tax reasons.

(iii) As securities funds are subject to different tax treatment

One of A’s mutual funds – A Likviditet – is still registered in G. The only reason for this is that the fund’s unit owners (who are all banks) need to be able to pledge the units in connection with lending from Norges Bank, and in order to achieve this Norges Bank requires the fund to be registered in G.

Of the 13 investment funds A manages, the costs associated with 12 will be charged with VAT, while the costs associated with one will be charged without VAT. That the administration linked to the various funds should be subject to different tax treatment is difficult to understand all the while the only difference between the funds is the platform on which they are administered.”

4.2. Notes to the secretariat’s draft recommendation

Taxpayers have commented on the secretariat’s recommendation in two letters, – letter of dd.mm. 2021 and letter of dd.mm. 2021.

In notice letter of dd.mm. 2021, taxpayers claim that both the tax office and the secretariat base their assessments on a flawed fact. At the request of the taxpayer, the secretariat has reproduced the taxpayer’s own description of the facts and legal statements as they appear in the complaint, in the setting above.

Taxpayers also state that the secretariat bases its assessment on a too narrow understanding of the concept of management. Also in the Tax Appeal Board’s decision NS 79/2020, to which the Secretariat refers, a too narrow understanding of the concept of management is based. Taxpayers state that the secretariat’s assessment is a restrictive interpretation of the exception provision, and in direct conflict with practice from the EU Court of Justice, including the Abbey National case, where it is clear that administrative, accounting and other compliance services are also to be considered administrative services.

In notice letter of dd.mm. 2021 refers taxpayers to the European Court of Justice’s recent decision in cases C-58/20 and C-59/20 (the “K and DBKAG judgment”).

In the notice letter, the taxpayer goes through the judgment, and states that the judgment clearly shows that the requirement that the benefit must constitute a separate unit is not a condition that the service is outsourced in its entirety, but that the exception rule can include benefits where the management company itself performs parts of the service . In the taxpayer’s view, the understanding laid down in K and the DBKAG judgment implies that the requirement that the benefit must constitute a separate entity is met for all services the taxpayer has acquired.

From the notice letter, the following is added:

“The decisive factor in the present case will be whether the benefits have a close connection with, and are specific and significant for, the management activities. It follows from K and the DBKAG judgment that services provided in the form of software solutions can be considered to fulfill this requirement. It can be deduced directly from the judgment that solutions that carry out calculations in connection with compliance with statutory reporting requirements can be considered essential for the management activities. In order to be regarded as specific for the administration business, it is a requirement that the software solutions are specially designed for such administration business.

In our view, there is a close connection between the services A has acquired and the management activities, and the services are also essential and specific to the management activities. As pointed out in our notes of ddd.mm. In 2021, the tax office and the secretariat have assessed this requirement to a small extent, as it is assumed that software solutions almost by definition fall outside the scope of application of the exception rule. We will therefore refer to the description of the acquired services in point 2.1 of the complaint of dd.mm. 2018, as well as to the subsumption included in point 4.1 of the complaint which still applies.

In light of the situation in C-58/20, we would like to highlight the C module [module 3] in particular. As described in the complaint of dd.mm. In 2018, the entire tax reporting process is carried out using the module. The module has been set up with a view to complying with Norwegian rules for taxation of shares in mutual funds. The module performs calculations based on data obtained from [module 4], another C module. The submission process is also mainly automated, but A arranges for the submission of certain reports himself. According to K and the DBKAG judgement, this should not be given weight. The secretariat has emphasized in the draft that it is A and not C who is responsible for the content of the reports and documents that are prepared. This should not be given weight either, cf. K and the DBKAG judgment with reference to the GfBk judgment.

In addition to [module 3], the acquired service first consists of three modules ([module 4], [module 5] and [module 6]) which together form a portfolio system. Here, portfolio management is carried out, which is an essential part of the management activities, and the modules are thus essential for the performance of the management activities. The system ensures that all transactions on behalf of the funds are carried out in accordance with regulatory requirements specific to mutual funds, e.g. when it comes to rules for the placement of the fund’s funds. The portfolio system is further specially adapted to A’s business, e.g. when calculating the management commission and the cost calculation per individual customer.

In parts of the control period, A has also acquired services from C mainly related to unit owner administration, which were previously handled by G (and invoiced without VAT). As a management company, A is required by law to keep a unit owner register. Entry in the unit owner register provides legal protection for the unit owner, both with regard to ownership, right to dividends, participation in unit owner meetings, etc., and the unit owner register is a very central part of a fund manager’s business. The acquisitions from C have consisted of an extended version of [module 4], the order module [module 1], the customer solution A Investor Services […] ([module 2]) and the service [module 3]. The extended [module 4] module and [module 1] together make up a full-fledged system for handling the unit owner register and customer settlement, including the calculation of commissions to the company’s distributors. A Investor services ( [module 2]) functions both as a solution that customers and advisers can use to register the purchase and sale of fund shares, and as a reporting solution. These modules have also been specially developed with a view to administrative activities, and essential for the performance of statutory administrative tasks as described above.

In summary, there is a close connection between the services C delivers and the management activities A runs, and the services fulfill specific and essential functions for the management activities, as these requirements are formulated in K and the DBKAG judgement.

A has an agreement with D regarding the delivery of the service “D [product 1]”. D supplies financial statistics and data, which A uses as a decision-making basis for market views and market exposure. The system delivers data both on geographical areas, sectors, countries and individual companies. D includes both interest, currency and shares, and is thus an integral part of the management on both the share and interest side.

The information and analysis provided by D is used as background information and the basis for the investments A makes on behalf of its customers. The information is thus central to A’s analysis of developments in the market, and thus constitutes an important factor in the decisions A makes in its ongoing management activities. In our opinion, these services also fulfill specific and essential functions for the administration business.”

4.3. Notes to the secretariat’s revised draft recommendation

Taxpayers submitted comments to the secretariat’s revised draft recommendation in a letter dated dd.mm. 2022 (Appendix 15).

In the notice letter, taxpayers express that they disagree with the Secretariat’s interpretation of the EU Court’s decision in the K and DBKAG judgment (C-58/20 and C-59/20), and that the Secretariat has based its application of the law on an incorrect understanding of the facts. Considering the facts, the taxpayer asked for a meeting with the secretariat to review the facts of the case.

The secretariat has accommodated the taxpayer’s request for a meeting, and an electronic meeting was held with the taxpayer, the taxpayer’s representative and the secretariat, dd.mm. 2022. The taxpayer’s presentation from the meeting follows from Appendix 16.

In a letter of dd.mm. refers taxpayers to previous descriptions of the specific modules from C, and states that the secretariat bases a too limited description of the content of the various modules.

Taxpayers also question the Secretariat’s interpretation of the EU Court’s decision in the K and DBKAG judgments (C-58/20 and C-59/20). Taxpayers express in this context that they have challenges in understanding how the secretariat can establish a requirement that the subcontractor services must consist of “concrete analyzes or advice” which “without further assessment” is added to the manager’s basis. Taxpayers state that the EU Court of Justice does not make any such requirement.

Taxpayers refer to the above as an “additional requirement” set up by the secretariat, and further state that in the event that such an “additional requirement” should be correct, the secretariat has in any case based its assessment on the wrong facts. In this regard, the taxable person states the following:

“The K case deals with a tax calculation function, which essentially corresponds to the service [module 3] provides, but where the latter also carries out the actual tax reporting. In both cases, the tax calculations are based on information provided by the administrator.”

And further:

“The DBKAG case concerns software that carried out calculations related to risk management and performance measurements. The [module 4] module handles performance measurements for A in a similar way, as well as other calculations/analyses as described in point 2. In both cases, the calculations are carried out based on input from the administrator, in the form of integration with the administrator’s other IT solutions. The EU Court of Justice has not considered this to be an obstacle to the service being considered to constitute a separate entity.”

Furthermore, taxpayers express that they react to the secretariat’s consistent use of the designation “tool” for the functions C provides, while the functions in the K and DBKAG judgment on page 35 of the draft are referred to as “effort factor[s] in the management company’s production of central functions in fund management”. Taxpayers state that it is not the case that A uses the C modules as “tools” to a greater extent than was the case in the K and DBKAG judgments, and there is no basis for distinguishing between the cases as the secretariat does.

In summary, taxpayers believe that the services C supplies to A consist of administrative functions that meet the requirement for a “separate whole” as interpreted by the EU Court of Justice in the K and DBKAG judgements.

Furthermore, taxpayers disagree with the secretariat’s assessments relating to the requirement that the subcontractor service must be “specific and essential”. In the notification letter, the taxpayer writes the following:

“When it comes to the actual understanding, the EU Court’s formulation “supplied exclusively for the purpose of its management” must be understood as meaning that the subcontractor delivers services for use for exempted management activities according to the EU Directive’s Article 135. In this context, we would like to point out that the exception rule in the EU Article 135 of the directive covers the management of “investment associations”, which cover both mutual funds and investment companies according to the corresponding exception rules in mval § 3-6 letters f and g. The EU Court’s statements relating to the specific nature of the service must be understood in light of this, and it is thus not a basis for the narrow application that the secretariat puts forward.

Transferred to the Norwegian exception rule, this means that services performed by subcontractors can fall under the management exceptions in mval § 3-6 f and g, as well as the exception for active management under letter e (which is not exempt from VAT under EU law). This understanding is in line with the principle of neutrality and other considerations behind the exception rule.”

Taxpayers emphasize here, as also pointed out in the previously submitted complaint, that taxpayers who are trustees are subject to a number of regulatory requirements regarding the activities to be carried out, both in terms of portfolio management, cooperative register management and general administration. It is indicated here that C’s solutions have been developed with the aim of performing parts of these functions. Taxpayers refer further to previous supplementary descriptions. The secretariat refers here to the taxpayer’s descriptions of the case set out in point 3 above.

Taxpayers specify here that it is not a matter of generic IT systems, but rather systems that have been specially developed so that the managers can fulfill the regulatory requirements for exercising management.

Furthermore, the taxable person clarifies that it has not been claimed by the taxable person that the services that the taxable person has purchased from C are individually covered by the exception rules on the basis of the tasks included in Annex II to Directive 85/611, to which the secretariat refers. The taxpayer states here that the taxpayer’s case is not about the outsourcing of individual elements, but rather the purchase of solutions which together form an advanced portfolio system and a complete solution for handling the cooperative register and customer settlements. From the taxpayer’s point of view, the modules fulfill specific and essential functions in the administration business.

In conclusion, taxable comments link to the secretariat’s assessments relating to the module “[module 3]”. Taxpayers point out here that the module handles the calculation and reporting of tax liabilities based on figures from [module 4]. The module is specially adapted to Norwegian special rules for taxation of units in mutual funds. Taxpayers clarify that it is therefore the unit owners’ and not the funds’ tax obligations that make up the significant volume of tax reports that are handled in the module.

In this context, taxpayers refer to the K and DBKAG judgments, where the EU Court of Justice laid decisive emphasis on the fact that the tax calculation function was specially adapted to the national rules on taxation for fund shares, so that the services would be considered essential and specific for the tax-exempt fund management. The taxpayer points out that the same applies to the module “[module 3]”, and states that there is no basis for reaching a different conclusion in the present case than in the judgment.

Taxpayers state that all the services from C must be assessed together, and that the services seen in context meet the requirements for the specific and substantial nature of the performance that can be derived from the EU Court of Justice’s decisions.

4.4. Notes in e-mail of dd.mm. 2022

Taxpayers gave the secretariat presiding notices in an e-mail of dd.mm. 2022 as a taxpayer requested to enter in the setting (appendix 17).  

Taxpayers refer to their own notices issued dd.mm. 2022 as well as their oral presentation at the meeting dd.mm. 2022, and points out that they cannot see that there is a basis for concluding that the services the taxable person acquires from C are of a less “independent” nature than in the aforementioned cases from the European Court of Justice, as the secretariat seems to base it on in the proposal .

Taxpayers claim here that there are no real differences between the tax calculation service in the K case and the service [module 3], beyond the fact that C, in addition to the tax calculations, also handles the tax reporting and thus delivers a service of a more independent nature than in the K case.

Taxpayers also point out that the DBKAG case concerns software that calculates indicators for performance measurements and risk analysis, which the administrators use to prepare statutory reports. The C module [module 4] calculates indicators for performance measurements, after which the statutory reports are prepared automatically in the system. [module 4] also handles other calculations and imposed reporting requirements, for example reporting of unit holdings to the unit owners. The service the taxable person acquires from C is therefore no less independent than the service the DBKAG case concerns.

As regards the GfBK judgment, the facts differ from the other cases in that it deals with investment advice, and not the outsourcing of administrative management functions. In the present case, the taxable person points out that the subject of assessment is whether the service in question can be considered independent in relation to the exempt administrative services that the taxable person provides, not in relation to the investment decision. Taxpayers therefore believe that the transfer value from the GfBK judgment is limited to the fact that the judgment establishes (i) that an administrative function must not be outsourced in its entirety in order to be covered by the exception rule in the EU directive and (ii) that individual service types can be covered by the exception rule.

In this context, taxpayers find reason to point out that the various C modules handle a number of the services that are referred to as administrative tasks in Annex II to Directive 85/611, and which, according to the practice of the European Court of Justice, may fall within the exception rule in Article 135 ( 1) g. This includes, among other things, value and price determinations, control of compliance with legislation, updating of the participant register, distribution of profits and redemption of fund shares. The handling takes place through systemic integration between the various modules and external systems, and with a very limited degree of human intervention by taxpayers. As described in the meeting, for example, handling of the unit owner register – which is a central part of the taxpayer’s management tasks – takes place almost automatically through the integration [module 4]/ [module 1]/ [module 2]. Another key example is the integration [module 4]/ [module 5]/ [module 6] which handles a number of the administrative tasks resulting from the regulatory requirements placed on portfolio management, such as control of compliance with legislation. Taxpayers then state that the services are clearly sufficiently independent based on the threshold set out in the K and DBKAG judgement.

Following this, the taxable person states that the secretariat’s assessment that the services the taxable person purchases from C do not fall under the exception rule on the basis of current practice from the European Court of Justice is incorrect.

5. The Tax Office’s assessments

The Tax Office has assessed the complaint as follows:

“The Tax Office has granted A a deferred appeal deadline until dd.mm. 2018. The complaint was received by email on this date so the complaint is timely. 

The duty to calculate value added tax on the import of services that can be delivered at a distance arises from mval section 3-30. It is stated here that VAT must be calculated on remotely delivered services that are purchased outside the VAT area. The VAT liability arises if the recipient is a trader or a public enterprise and the service is subject to VAT on turnover in the VAT area.

The salient point in the case is whether the purchased services from C and D are subject to tax in Norway. The other conditions for tax liability, that the services can be delivered remotely and that A is a trader, are met.

The services provided by C are subcontracted services to A’s business of managing securities funds.

The Tax Office will first look at which services are provided by C and D and what nature these services have. The services C has delivered throughout the control period appear from “Order Schedule #1 C OnDemand Managed Hosting Services” dated dd.mm. 2011, cf. appendix 3 to the report. This document serves as “firm confirmation of Licensee’s order to license the following Subscription (The “Subscription”) and receive the services during the term, as defined below, and to engage C for the additional Services, if any, for the fees described” . The delivery method is described as C OnDemand Managed Hosting, which means that it is C that operates the server that A uses. The document entitles A to […] licenses for concurrent users of the software “C [module 4]” and [… ] licenses to concurrent users of the software [module 5]. 1 license is also given for different software such as [module 6], [module 7], [module 8], [module 9], [module 10], inventory reports etc. It appears that the software can only be used for a specified period for the specified number of users. The document obliges C to provide maintenance and training services in connection with the software.

The Tax Office will also refer to the description of the services that appears in point 2.2 of A’s letter of dd.mm. 2017, see appendix 3 to the report. It appears here that the agreement mentioned above means that C supplies various technical management functions for use in A’s management activities. Among other things, the modules are described as follows:

• [module 4] ([module 4]) – a portfolio module where A registers and monitors the fund portfolio centrally in a platform.
• [module 5] – an order handling system where A registers orders (and cancellations) when buying and selling securities
• [module 6] – a tool A uses to ensure compliance with rules and frameworks for securities trading and ongoing management.

From the website of C, the following description of [module 4] and [module 5] appears:

[citation homepage]

From the second half of 2017, C has provided additional services to A. This concerns the service [module 1.] which is an order management system used to optimize and automate the processing of transactions made on behalf of the customers, the service [module 2] which looks after the customers’ statutory and contractual right to information about holdings, transactions, annual statement etc. and gives the customer the opportunity to carry out fund transactions themselves and the service [module 3] which carries out tax reporting to public authorities and customers. It appears from the introduction of the agreement that “This document serves as firm confirmation of Licensee’s order to license the following software, maintenance and services……….”. It also appears that a license is granted to use, among other things, the software [module 1] and [module 3] in the period dd.mm. 2017 – dd.mm..2020.    

The service provided by D is based on an agreement dated dd.mm. 2014, see appendix to the report. The agreement is named “license agreement” and gives A the right to 1 license to D [product 1) at an annual price of NOK 98,000. D [product 1] is a database that A can use to extract and analyze information about potential investments. In the part of the agreement “General terms and conditions” under section 3 “License” the following appears, among other things: “Subject to these General Terms, D grants to the Customer a non-exclusive, non transferable license, to use the License Products (together with any new versions, upgrades or updates) which D may wish to provide from time to time, during the License Period, at the Customer’s premises for its own business Purposes, such license coming into force on payment of the relevant License Fee to D (“Commencement Date”). This license only entitles the Customer to use and display the copy of copies of the Licensed Products on a single personal computer or if on a multiuse computer network on as many computers as agreed in the License Agreement”.  

For further details about what has been delivered, reference is made to the agreements that appear in appendices 7 – 9.

The tax office will look into the legal situation in the area. In the interpretation statement from the Ministry of Finance of 15 June 2001, it is assumed that EU law becomes important when interpreting the exemption for financial services, current mval section 3-6. It also appears from the interpretative statement that services from subcontractors will be exempt from duty if they are special, specific and essential for a financial service. In the Abbey National judgment (C-169/04), this legal sentence was expanded with the following passage: “if, seen together, they constitute a distinct entity”. The judgment established that a combined package of various administration services from a subcontractor, which had been liable to tax on independent delivery, could in itself be considered an exempt administration service. In the judgment, it was assumed that the overall package of services constitutes a separate unit and that they are essential and specific for the management of mutual funds and investment companies. It further appears from the judgment that:

The services provided must therefore relate to the specific and essential elements of investment associations. The mere delivery of an actual or technical service, such as e.g. that a data processing system is made available is not covered by ……….

On 14 November 2017, the Directorate of Taxes issued a joint letter in which it is concluded that the VAT Handbook’s mention of management services from subcontractors in section 3.6.9 is still the starting point for understanding the concept of management in the Value Added Tax Act § 3-6 first paragraph letters f and g. It appears from the VAT Handbook ch 3.6.9 under the keyword “management, subcontractor” that “the condition is that the services performed constitute a separate entity and that they are essential and specific for the management of investment associations (securities funds) and investment companies”.

It also appears from the joint letter:

The VAT handbook then mentions – under the same section 3-6.9 – the EU Court’s decision in C-275/11 (GfBk). The decision shows that the above-mentioned reference to a separate unit and “collection of services” is only a starting point for the assessment, and that within the framework of the statements in the Abbey case there is room to consider individual types of services covered by the exception when further conditions are met. As is well known, the GfBk case indicates that it must apply to a type of service that is closely connected with (“intrinsically connected to”/”substantially connected to”/”Close connection with”) the operations of management companies, and which also fulfills more detailed criteria, which collectively gives the service the character of being a specific and essential function for the management of an investment company.

The underlying case in the GfBk case concerned investment advisory services – advice on the purchase and sale of assets – which the court found prejudicial to consider differently than the case in the Abbey case, which concerned a number of services of an administrative and accounting nature, ….” .

The Tax Office will point out that the Court of Justice of the European Union in case C-453/05 – Volker Ludvig 21 June 2007 states that the exception provisions must be interpreted strictly, as they must be seen as an exception to the general principle of tax liability for services.

The Tax Office will present the Tax Appeal Board’s case 43/2018, which was processed in a large division, even if this is not fully equivalent to the case in question. The issue in the case was whether the services in question are subject to tax in the case of domestic turnover. The services consisted of the delivery and operation/maintenance of specially adapted software for use by taxpayers in the sale and administration of pension savings products with investment options. Here we were talking about IT solutions in the form of a standard professional system that has been specially adapted to help manage some of the complainant’s pension and savings products. In the case, the question of whether services that had to be considered as technical/administrative services could be considered as specific and essential elements for the execution of payment orders, cf. mval section 3-6 letter c.

The Tax Office will also refer to the Tax Appeal Board’s decision in case NS 168/2018. The question in the case was whether the taxable person’s supply of “software as a service” to a bank is covered by the exemption for financial services in mval section 3-6. The service consisted of providing access to an internet-based IT platform with various modules and functionality which, in an automated way, performs various tasks in the customer’s banking operations. The service is provided as a right to use the system against payment of a monthly fee. The Board of Tax Appeals assumed that the supply was not covered by the exemption in mval section 3-6, as the taxable person supplies services of an administrative and technical nature.

The Tax Office has in a letter of dd.mm. 2018 to a law firm went into a little more detail on the VAT exemption for the management of mutual funds. In the letter, among other things, tentative assumptions are made for certain typical cases in relation to the administrative exception. In relation to analysis/advice, it is pointed out that in the tax office’s opinion, analysis/advice relating to companies/financial assets, markets and trends does not in itself constitute a function that is specific to fund management. In order for analysis/advice on buying/selling to be said to be linked to real asset management and to include significant parts of the follow-up work, it is assumed that the services must be specifically geared towards the individual fund. In the tax office’s opinion, this means that the exception is initially reserved for analysis/advice that is given on the basis of the fund’s portfolio as it is composed at any given time. In relation to administrative services versus IT services, it has been stated that in the tax office’s view there is no basis for IT/consulting services linked to e.g. development of the manager’s IT systems, in itself must be covered by the management exception. Similarly, in the tax office’s view, deliveries of IT services, including software that the fund manager uses himself to perform the functions that can be said to constitute management, will apply. development of the manager’s IT systems, in itself must be covered by the management exception. Similarly, in the tax office’s view, deliveries of IT services, including software that the fund manager uses himself to perform the functions that can be said to constitute management, will apply. development of the manager’s IT systems, in itself must be covered by the management exception. Similarly, in the tax office’s view, deliveries of IT services, including software that the fund manager uses himself to perform the functions that can be said to constitute management, will apply. 

In the complaint, reference is made to the Oslo district court’s judgment of 16 August 2017, where a decision was made as to whether the business run by Gjensidige Pensjonsforsikring AS could be considered a fund / investment company in accordance with mval section 3-6 letters f and g. It appears that the case from the descriptions seems to have significant similarities with our case. It is pointed out that it is therefore worth noting that the tax authorities, both in connection with the processing of the appeal case and later before the courts after an assessment based the company’s view that the subcontracted services could be considered administrative services in accordance with mval section 3-6 letter f and g. The Tax Office would like to point out that the Oslo District Court agreed with the state’s view that Gjensidige Pensjonsforsikring’s activities with defined contribution pensions, did not mean that Gjensidige Pensjonsforsikring could be considered to constitute a securities fund or investment company. The subject condition in mval § 3-6 f and g was not met and the company was obliged to pay value added tax on the purchase of services for use in this business, regardless of whether the services in question could by their nature be said to constitute management.

The services delivered from C and D to A must be assessed in relation to whether the services fall under the administrative exception. It is the nature of the services that is the basis for assessment. In this assessment, what emerges from the delivery agreements is timely and central evidence that must be emphasised. In this connection, the Tax Office will refer to the Supreme Court’s decision in the Carnegie/ABG case (UTV-2010-14) in section 57:

The written agreements must be the starting point, and it must be correct to read the agreements on the basis of what appears to be the closest consideration to normal practice in the industry and the circumstances of the specific case. The subsequent explanations can of course also be suitable to clarify what the assignments consisted of and what the purpose of these is, but the interest the parties will have in the outcome of the case must be taken into account when assessing what weight the explanations should be given.

As regards services provided by C throughout the control period, this appears based on the agreement as the purchase of license rights. It appears as agreements on access to computer systems to be used in administrative activities. The services are referred to in the appendix as “portfolio management technology”, which appears as the delivery of the technical solutions that A makes use of. In addition, there are services related to training in the use of the systems and maintenance services. This is supported by what appears on C’s website and which is reproduced above in relation to [module 4] and [module 5]. It appears as licenses for the use of computer platforms. The position is further supported by what A himself states in a letter dated dd.mm. 2017, at the top of page 2 under section 2.2 (Annex 3 of the report). It appears here that [module 4] is a portfolio module where A registers and monitors the fund portfolio in one centralized platform. [module 5] is referred to as an order handling system where A registers orders for purchases and sales. [module 6] is a tool A uses to ensure compliance with rules and frameworks. In the tax office’s opinion, the services represent functions made available to A and not tasks performed by C. It is A himself who performs the administration service. The Tax Office will also show that C is charged with training responsibility in relation to the use of the software. The services provided by C must be considered a technical service and not a financial service. [module 6] is a tool A uses to ensure compliance with rules and frameworks. In the tax office’s opinion, the services represent functions made available to A and not tasks performed by C. It is A himself who performs the administration service. The Tax Office will also show that C is charged with training responsibility in relation to the use of the software. The services provided by C must be considered a technical service and not a financial service. [module 6] is a tool A uses to ensure compliance with rules and frameworks. In the tax office’s opinion, the services represent functions made available to A and not tasks performed by C. It is A himself who performs the administration service. The Tax Office will also show that C is charged with training responsibility in relation to the use of the software. The services provided by C must be considered a technical service and not a financial service. 

For the services provided by C from the second half of 2017, the agreement appears as a license agreement that is granted for a limited number of users for a specified period. The service is delivered Managed Hosted, which means that the software is on a server at C, which has the technical responsibility. In the tax office’s opinion, this will be roughly the same as for other businesses’ acquisition and use of computer systems operated by the supplier. As regards the service [module 2], it appears from the complaint that this is a solution that can also be used by customers to register purchases and sales. C does not perform the services here either, but provides access to the necessary software. These services must also be considered a service of a technical nature.

The assessment of the service purchased from D will be similar. It is clear from the agreement that it is a license agreement that gives the right to 1 license to the D Application. The Tax Office will note that it seems unnecessary to have a provision on limiting the number of licences/users if this is a service that D performs. It is a non-exclusive license so that the same can also be offered to others.

In the GfBk decision, case C-275/11, it was shown that within the framework of the Abbey case, there is room to consider individual service types covered by the exception when further conditions are met. The conditions must be that it applies to a type of service that is closely related to the management company’s operations, and which, in addition, collectively gives the service the character of being a specific and essential function for the management of an investment company. The underlying services in the GfBk case were investment advisory services. These are of a completely different nature to the services that C has provided to A. These services must, as appears above, be considered to be of a technical nature and cannot be considered to be a specific and essential function for the management of an investment company.

An individual assessment of the services means that the services must be regarded as services of a technical nature and thus fall outside the exception in mval § 3-6. In the complaint, it is stated that an overall assessment of the services provided by C means that, especially from the second half of 2017, they have provided services to an even greater extent that constitute a comprehensive and separate unit that is specific and essential for the management activities.

In the Abbey National judgment, it was established that a combined package of various administration services from a subcontractor (by listing several services that would have been subject to tax in the case of independent supply) was in itself considered an exempt administration service. It was assumed in the judgment that the overall package of services constitutes a separate entity and that they are essential and specific for the management of mutual funds and investment companies. The Tax Office would like to point out that in this case it is not a question of a combined package of services, but services of the same nature. Buying several services of the same type will not, in the tax office’s opinion, mean that the services fall under the exemption in mval section 3-6. The purchase of the services from C and D, will also not fall under the exemption based on the Abbey National judgment, as the services cannot be considered essential and specific for the management of securities funds and investment companies. It appears from the complaint that C offers a wide range of delivery models, where the service offer at one end includes the sale of rights to use individual C modules on its own server, while at the other end it offers comprehensive management solutions delivered via a “hosting” function. The Tax Office will note that how the service is delivered is unlikely to have a decisive influence on the assessment of the nature of the service. The characteristics of the service will be the same regardless of the delivery method. It appears from the complaint that C offers a wide range of delivery models, where the service offer at one end includes the sale of rights to use individual C modules on its own server, while at the other end it offers comprehensive management solutions delivered via a “hosting” function. The Tax Office will note that how the service is delivered is unlikely to have a decisive influence on the assessment of the nature of the service. The characteristics of the service will be the same regardless of the delivery method. It appears from the complaint that C offers a wide range of delivery models, where the service offer at one end includes the sale of rights to use individual C modules on its own server, while at the other end it offers comprehensive management solutions delivered via a “hosting” function. The Tax Office will note that how the service is delivered is unlikely to have a decisive influence on the assessment of the nature of the service. The characteristics of the service will be the same regardless of the delivery method. unlikely to have a decisive influence on the assessment of the nature of the service. The characteristics of the service will be the same regardless of the delivery method. unlikely to have a decisive influence on the assessment of the nature of the service. The characteristics of the service will be the same regardless of the delivery method.

In the complaint, it is pointed out that it is unfortunate and distorts competition that a Norwegian supplier should be able to be invoiced without VAT, while the taxable person is required to calculate reversed settlement when purchasing similar services from a foreign supplier. It is pointed out that the services G/H delivers correspond essentially to the unit owner services that A now procures from C. The Tax Office will note that which services fall under mval § 3-6 must be assessed based on the nature of the service. Services of a technical nature will never fall under the exception in mval section 3-6.

The same must apply in relation to discrimination. The services must be assessed concretely based on the nature of the services. To the extent that services of a technical nature will be considered to fall under the exemption in mval § 3-6, this will rather be considered to involve differential treatment in relation to how such services have traditionally been treated.

In section 4.4 of the complaint, it is pointed out that when dealing with the complaint it is central to be clear about the consequences of upholding the tax office’s decision. It is pointed to the erosion of administrative practice linked to mval § 3-6, letter f, that different suppliers are treated differently and that As verdipapirfond is subjected to different tax treatment. As the tax office perceives this, the pointed out consequences are based on the fact that the subcontractor services provided by C and D are services that are special, specific and essential for the management activities. As it appears above, the tax office’s opinion is that the services provided by C and D are of a completely different nature and thus not special, specific and essential for the administration activities.

On this basis, the tax office considers that the decision of dd.mm. 2018 is correct. The purchase of the services from C and D would have been subject to tax on turnover in Norway according to mval section 3-1 and thus covered by the rules in mval section 3-30, 1st and 2nd paragraph.”

6. The secretariat’s assessments

6.1. Formal conditions and conclusion

The Tax Appeals Board is the right appeal body according to Section 13-3 second paragraph of the Tax Administration Act. When the appeal is taken under consideration, the Tax Appeals Board can try all sides of the case, cf. Tax Administration Act § 13-7 second paragraph.

The secretariat, which prepares cases for the Tax Appeals Board, recommends that the taxpayer’s appeal be accepted in part, as the secretariat considers one of the purchased modules, “[module 3]”, to be covered by the tax exemption for management of investment funds, cf. the Value Added Tax Act § 3-6 first paragraph letter f).

6.2. Assessment

6.2.1. Legal starting point and overall assessment theme

The starting point and main rule is that value added tax must be calculated for all sales of goods and services, cf. the Value Added Tax Act § 3-1. When purchasing services that can be delivered remotely that are covered by the Value Added Tax Act § 3-30, the recipient of the services must calculate and pay the value added tax, cf. the Value Added Tax Act § 11-3 first paragraph.

The VAT Act § 3-30 first and second paragraphs reads as follows:

” (1) VAT must be calculated on remotely delivered services that are purchased outside the VAT area. However, this does not apply if the service is included in the basis of calculation according to section 4-11, first paragraph.

 (2) The VAT liability according to the first paragraph arises if the recipient is a trader or a public enterprise resident in the VAT area and the service is subject to VAT in the case of turnover in the VAT area.”

It is undisputed in the case that the purchased services in question are services that can be delivered remotely, and that the taxable persons are businesses that belong to the VAT area. In this case, the decisive factor for the duty to pay tax is whether the services would have been subject to VAT in the event of turnover in the VAT area, cf. the VAT Act § 3-30 second paragraph.

The central question in the case is thus whether the services from C. (hereafter “C”) and D (hereafter “D”) would have been subject to tax in the case of domestic sales according to the main rule in the Value Added Tax Act § 3-1, or whether they would have fallen under the exception for financial services in the Value Added Tax Act § 3-6, which reads as follows:

“Turnover and provision of financial services are exempt from the law, ​below

1. turnover of insurance services
2. turnover of financing services, but not financial leasing
3. execution of payment orders
4. turnover of valid means of payment
5. turnover of financial instruments and the like
6. management of securities funds ​
7. management of investment company”

In the present case, it is relevant to discuss whether the services purchased from C and D are covered by alternatives e, f or gi § 3-6 of the Value Added Tax Act.

This is stated by the draftsman of the law, Ot.prp. no. 2 (2000-2001), that the exception is linked to the nature of the service that is provided, and not who provides it. The secretariat is of the opinion that subcontractor services on an independent basis must be considered financial services according to Section 3-6 of the Value Added Tax Act for the exemption to apply. The following appears from point 7.2.5.5 of the aforementioned pre-processor:

“The department clarifies that services that are currently subject to VAT will not be covered by the exception. Furthermore, it is specified that the tax-related status of each business is initially assessed in isolation. A subcontractor can therefore sell taxable services, even if the service at a later stage of turnover will be a part of a duty-free service. It may be relevant for those cases where a business has outsourced parts of its business to a separate company. However, a subcontractor’s service may be of such a nature that it can be regarded in isolation as a financial service that is proposed to be exempt .”

Similarly, it is stated in the Ministry of Finance’s interpretive statement of 15 June 2001 point 4:

“On the other hand, services provided by subcontractors to businesses that sell financial services may in themselves be financial services and thus exempt from tax liability. It is pointed out here that the delimitation of which services are exempt depends on whether the service is by its nature a financial service.”

The main question of the case is therefore whether the service deliveries from the foreign subcontractors can in themselves be considered financial services, more specifically whether the subcontractor services involve “management of mutual funds” and thus exempt according to the Value Added Tax Act § 3-6 letter f.

It is in the draft law, Ot.prp. no. 2 (2000–2001), indicated that the exemption for financial services is in accordance with a similar exemption in most other countries with which it is natural for Norway to compare itself.

Also in Rt-2009-1632 (Sundal Collier), the Supreme Court regards the EU Court’s practice as a weighty source of law when the exception for financial services is interpreted. In the judgment, the Supreme Court states the following:

“It is the practice of the EU Court of Justice that will have the greatest significance for the understanding of the corresponding tax exemptions in Norway. This must particularly be the case when, in this area, it has proved difficult to establish a uniform practice in the EU countries. What will then be of particular interest are the more general principles of interpretation that the EU Court of Justice has established.”

According to the practice of the European Court of Justice, it is clear that subcontractor services that a management company procures as part of its tax-exempt business may be covered by the law’s concept of management, cf. the European Court of Justice’s judgment in C-169/04 (Abbey National), C-275 /11 (GfBk), C-231/19 (BlackRock) and the joined cases C-58/20 and C-59/20 (K and DBKAG). In the latter judgment, the overall assessment theme for when a subcontractor service can be considered exempt from management is summarized as follows in section 33:

“In order to qualify as exempt transactions as referred to in the VAT Directive, Article 135, subsection 1, letter g), the services provided by a third-party administrator shall, however, when viewed as one, constitute a separate whole, and they shall be specific and essential for the management of investment associations […]”

It follows from the EU Court’s practice that the assessment topics are the following:

• Whether the service constitutes a “separate whole”
• Whether the service is “specific and essential” for the exempt management of mutual funds

At the same time, it follows from the EU Court’s practice that a strict interpretation must be made, as this concerns exceptions to the general principle of tax liability in the case of services provided for consideration, cf., among others, C-58/20 and C-59 /20 (K and DBKAG) section 30.

With this as a starting point, the secretariat has carried out a closer assessment of the acquired services in this case. Reference is made to the attached agreements, which contain a detailed description of the types of services procured, as well as to the taxpayer’s descriptions of the services in the case.

6.2.2. Services provided by C

In the period 2014-2016, the taxable person had an agreement with the foreign company C (“C”) regarding the supply of “[product 2]”. The agreement has meant that C supplies various technical management functions for use in the taxpayer’s business. The service from C is delivered in the form of a software license through the various modules: [module 4], [module 5] and [module 6].  From 2017, C has sold additional services to taxpayers by supplying the modules [module 1] [module 2] […]) and the service [module 3] .

The various software require that taxpayers enter data into the software, extract data or actively use the software to make calculations etc.

In addition, C provides a “hosting” function, which means that it is C that operates the server that the taxable person uses. C has functional responsibility for the content of the various modules included in the “on-demand” solution.

The Secretariat refers to point 3 above where the taxpayer’s descriptions of the various modules are reproduced. Reference is also made to the attached agreements in the case, as well as the taxpayer’s presentation of C’s modules in appendix 16.

In summary, taxpayers have described the various modules as follows:

[Module 4] ([module 4] portfolio system) – Taxpayers describe the software as a portfolio module where taxpayers register and monitor the fund portfolio centralized in one platform. Among other things, securities trading and up-to-date liquidity changes in the funds, commission calculations, pricing of the various funds, basis for bank and custodian reconciliation and the like are handled here. The module delivers various types of reports and the functions from here help to design supporting documentation for use in accounts, tax returns, etc.

[ Module 5] – Taxpayers describe the software as an order handling system where A registers orders and cancellations for the purchase and sale of securities. The system generates the basis for the payment instructions.

Taxpayers state that the programs [module 4] and [module 5] interact in such a way that when the purchase and sale of securities in the funds is made, the managers register orders and cancellations in the order handling system [module 5]. Information about the trade is then transferred from [module 5] to [module 4]. The registration in [module 5] forms the basis for payment and settlement instructions. Taxpayers’ use of the software in this way ensures, among other things, that the different portfolios’ funds are kept separate. Taxpayers point out that it is required to have an efficient and secure portfolio system so that management can take place in accordance with all regulatory requirements.

[Module 6] – This program is described by taxpayers as software that is used to ensure compliance with rules and frameworks for securities trading and ongoing management. The program ensures that the administrator is notified if an intended trade will lead to a breach of one or more rules. Taxpayers inform that this function is an important part of the compliance work.

In the taxpayer’s presentation of the various modules (appendix 16), the interaction between the above-mentioned modules is summarized as follows:

• The purchase and sale of securities in the funds are handled in the [module 4] portfolio system
• In addition to the securities trading itself, the module handles up-to-date liquidity changes in the funds, price calculations, pricing of the various funds, as well as the basis for bank and custody reconciliations
• Performs extensive calculations and analyses, e.g. linked to pricing, calculation of management commission and cost calculations per individual customer
• Calculations/analyses are based on data input from other data sources A purchases, i.a. Nordic Bond Pricing and Bloomberg. [module 4] portfolio system is further integrated with [module 5] and [module 6]
• [Module 5] is an order management system where the administrators register orders and cancellations, including brokerage and bank fees
• Information about the trade is transferred from [module 5] to [module 4]. The registration in [module 5] also forms the basis for payment and settlement instructions, which are sent to the funds’ custodian bank
• [Module 6] contains all rules for the placement of the fund’s funds – both according to the articles of association and the law
• The integration between [module 6.] and [module 4] portfolio system ensures that the manager is notified if an intended trade will lead to a breach of one or more rules, and meets regulatory requirements for internal control methods

Furthermore, taxable persons describe the other services as follows:

• [Modul1] – an order module that is used to optimize and automate the processing of transactions made on behalf of customers. The module manages and updates the unit owner register and handles the customer settlement.
• [Module 2] ( […]) – an information and communication solution for A’s customers and intermediaries. The system satisfies the customers’ statutory and contractual right to information, including access to information about holdings, transactions, annual statements etc. via a separate login function. Customers can also carry out fund transactions. Intermediaries are given access to customer information of a more limited scope, which is used in dialogue with customers.
• [Module 3] – handles calculation and reporting of tax liabilities based on figures from the C-module [module 4] portfolio system. The module is adapted to Norwegian rules for taxation of shares in mutual funds. The module handles both the unit owners’ and the funds’ tax obligations, of which the unit owners’ tax reports make up the significant volume. C is fully responsible for the reporting process, while A is only responsible for the validation.

The above-mentioned factual information about the services also seems to be based on the tax office.

Assessment of tax liability

When assessing whether the services purchased by C meet the conditions for being considered as exempt management of securities funds, the secretariat takes as a starting point the functions/tasks that characterize such activities.

According to section 1-2 first paragraph no. 3 of the Securities Act, securities management is defined as “collective portfolio management, administration and marketing, including sales, of securities funds”. Similarly, Annex II to the directive on investment institutions (2009/65/EC) contains the following non-exhaustive list of tasks that a management company typically takes care of:

« – Investment management

       – Administration:

a) legal assistance and accounting services in connection with fund management

b) customer inquiries

c) value and price determination (including tax returns)

d) control of compliance with legislation

e) updating the participant register

f) distribution of profits

g) issue and redemption of shares

h) contract establishment (including sending of evidence)

i) registration

– Marketing”

As appears from the taxpayer’s description, the services cannot be considered to fully fulfill a function that characterizes the management of mutual funds, but that the services constitute a tool for use in the taxpayer’s production of exempt management services. The function of the services in the exempt administration therefore requires cooperation with the taxpayer’s own supplies.

The question is how such cooperation with the taxpayer’s own deliveries is in relation to the condition that the subcontractor services must constitute a “separate whole” in order to be considered an exempt administrative service.

When assessing this, the secretariat takes the joint cases K and DBKAG (C-58/20 and C-59/20) as a point of departure. These cases also concerned the question of the tax status of services a management company had outsourced to subcontractors. More specifically, the cases concerned subcontractors’ handling of fiscal tasks (C-58/20) and delivery of the right of use to a software for risk management and performance measurement (C-59/20). Common to both cases was that the subcontractor’s contribution was included as an input factor in the management company’s production of central functions in fund management, without these services being outsourced in their entirety. In paragraphs 35 and 36 of the judgment, the following appears:

“To determine whether services provided by third parties to management companies, which manage investment funds, are covered by the exemption laid down in the VAT directive, article 135, subsection 1, letter g), it must first be examined whether these services, seen as a whole, constitute a separate whole.

In this respect, it is noted that the condition of a “separate” character cannot be interpreted in such a way that a delivery of a service, which is specific and essential for the management of investment associations, must be outsourced in its entirety in order to be covered by the exemption, where is laid down in the VAT Directive, Article 135, subsection 1, letter g).” (secretariat substr.)

Consequently, it will not be disqualifying for whether a subcontractor is considered to deliver a tax-exempt management service, that the subcontractor service does not fully take care of a management task that the management company has undertaken to deliver to a mutual fund.

When the European Court of Justice sets a condition of “separate whole”, the secretariat nevertheless understands this to mean that not every service purchase from a subcontractor will fulfill the requirement. In the secretariat’s opinion, the condition “separate whole” indicates that the subcontractor’s delivery must meet certain requirements for the independent nature of the performance in order for this to be considered a tax-exempt management service. What is required of the independent nature of the performance is illustrated through cases before the EU Court of Justice, where the condition has been assessed as fulfilled.

In case C-58/20 (K), the subcontractor provided services where relevant values ​​were calculated for taxation of the fund participants’ income. The management company then used these calculations as a basis and reported the amounts – without changes – to the reporting unit. Reference is made here to section 10 of the judgment.

In case C-59/20 (DBKAG), the subcontractor supplied software that calculated risk and performance indicators, which the management company then used in reports to authorities and investors. Reference is made here to section 17 of the judgment.

Reference is also made to C-275/11 (GfBk) where the subcontractor gave concrete recommendations on the purchase and sale of securities, which the management company incorporated into its order system without making any independent choice in relation to the recommendations given. Reference is made here to section 16 of the judgment. 

Common to these cases from the European Court of Justice is that the subcontractors provide services in the form of specific analyzes or advice in relation to the management company’s fund – be it tax calculations, calculations of risk and performance indicators or specific recommendations about buying or selling – as if without further assessment is added as a basis by the management company for fund management.

 [Module 3]

With regard to the service “[module 3]”, the taxpayer points out that the service is comparable to the services that were assessed by the EU Court of Justice in C-58/20 (K). Like the subcontractor in case C-58/20, C supplies through “[module 3]” tax calculation services to the fund manager related to the fund participants’ income. Like the subcontractor “K” in the aforementioned case, C bases its calculations on figures provided by the fund manager. Furthermore, it appears that both the taxable person and the fund manager in the “K-case” without further processing use the tax calculation made by the subcontractor as a basis, and report to the tax authorities.

The secretariat sees that the service “[module 3 ]” is very similar to the fact in the aforementioned case from the European Court of Justice. Following this, it is therefore the secretariat’s opinion that C’s services in this context must be considered to constitute a “separate whole”, taking into account the EU Court of Justice’s latest practice.

Furthermore, it is the secretariat’s understanding that the module “[module 3]” takes care of functions that are particularly aimed at fund management, in that the subcontractor prepares tax reports through the module adapted to special rules for taxation of fund shares. 

Following this, it is the secretariat’s assessment that the module “[module 3]” must be considered to be a service which both constitutes a “special whole” and which is “specific and essential” for the taxpayer’s fund management, and thus must be considered to be covered by the exception for management securities fund, cf. the Value Added Tax Act § 3-6 first paragraph letter f).

The secretariat insists that the post-calculated value added tax linked to the purchase of the service “[module 3]” be waived.

The secretariat cannot see that it is clear from the case information what proportion of the post-calculated amount can be allocated to the purchase of the service “[module 3]”. Assuming that the Tax Appeal Board reaches the same result as the secretariat, the tax office must be clarified how large the amount refers to this module, when implementing the decision.

Other modules from C

As regards the other modules delivered by C, the secretariat insists that the tax office’s post-calculation be maintained. It is noted that the secretariat has had doubts about the conclusion.

For the other modules delivered by C, the secretariat cannot see that there is the same similarity with the EU Court’s decision as the module “[module 3]”.  

In contrast to the European Court of Justice’s decisions C-58/20, C-59/20 and C-275/11, the secretariat cannot see that the above-mentioned other services involve specific analyzes or advice in relation to taxpayers’ funds, which are added without further assessment due to fund management. Like the tax office, however, the secretariat understands that the software [module 1] and [module 2] are tools that taxpayers use in their administrative work. The software [module 4] describes taxpayers as a word module that taxpayers use as a tool in their portfolio management. Furthermore, the software [module 5] is described as an order handling system where A registers orders and cancellations when buying and selling securities.

In this way, it is the secretariat’s assessment that the modules cannot be considered to be of a similar independent nature to the services that were assessed in the aforementioned cases from the EU Court of Justice. Based on this, the Secretariat cannot see that practice from the EU Court of Justice provides a basis for concluding that the software  [module 1], [module 2], [module 4] or [module 5] sufficiently constitutes a “separate whole”.

As the secretariat sees it, the software must first and foremost be regarded as a tool in the taxpayer’s administrative work. In this way, it is the secretariat’s assessment that the module cannot be considered to be of a similar independent nature to the services that were assessed in the aforementioned cases from the EU Court of Justice.

Nor can the secretariat see that the legal source material otherwise provides a basis for a further understanding of the condition “separate whole” than what can be derived from the above-mentioned judgments from the EU Court of Justice. In this context, it is also taken into account that a strict interpretation must be made as this concerns an exception to the general principle of tax liability in the case of services provided for remuneration, cf. among other things C-58/20 and C-59/20 (K and DBKAG) section 30.

With regard to the software [module 6] , the secretariat cannot see that the services C has undertaken to deliver meet the condition related to the “specific” nature of the performance, as the condition is further specified in practice by the EU Court of Justice.

As the secretariat perceives the software, this does not include services that are provided solely for the purpose of managing securities funds. As the services are described, the secretariat believes that these are services that could just as easily have been provided by the management of other types of investments/funds.

The fact that the services from C are stated to be part of the administrative tasks mentioned in Annex II to Directive 85/611 cannot be decisive either. This list contains tasks that a management company will usually take care of when managing securities funds. However, the list cannot be understood as an overview of tasks that are individually considered specific for the management of mutual funds, and which thus constitute independent tax-exempt financial services when individual elements are contracted out to a subcontractor. 

Nor can the secretariat see that the services the taxable person has purchased from C in the period from 2017 fulfill the condition relating to the “specific” nature of the performance.

The more detailed content of the condition on the “specific” nature of the performance is specified in the judgment of the European Court of Justice in the combined cases C-58/20 and C-59/20, paragraphs 56 to 58. It follows here that a subcontracted service will be able to be sufficiently specific if the service is provided solely for the purpose of managing securities funds, and not for the purpose of managing other types of investments/funds.

However, as the secretariat perceives the above-mentioned software, this involves services that are not necessarily software that can exclusively be used in connection with the management of mutual funds. As the software is described, the secretariat cannot see that the modules could not be delivered for use in other types of investments/funds, than mutual funds. The secretariat can therefore hardly see that the modules [module 1] and [module 2] constitute services that are specific to the management of securities funds.

The Secretariat has subsequently come to the conclusion that the above-mentioned services provided by C do not meet the conditions set by the EU Court of Justice for considering subcontractors to provide tax-exempt management services, and that the same must be taken into account in the assessment according to the Value Added Tax Act § 3-6 letter f. The services are therefore considered subject to tax.

6.2.3 Services provided by D

Description of the services

Taxpayers have also purchased remotely delivered services from the Swedish company D (“D”). Like the services from C, the services from D are delivered in the form of a software license.

Taxpayers describe the services from D as follows:

“C [product 1] is a service with functions that provide a basis and underlying documentation for use by A in their business, and the service can, among other things, is used to produce historical and financial data and statistics. The functions in C [product 1] enable A to retrieve and analyze information about potential investments. Consequently, the information and analysis provided by D is used as background information and the basis for the investments A makes on behalf of its customers.

Through the service from D, A can i.a. retrieve reports that provide information on the stock market in various geographical areas and sectors, as well as manage their stock exposure based on various pricing models in the system. This information is central to A’s analysis of developments in the market, and thus constitutes a central factor in the decisions A makes in its ongoing management activities.

Assessment of tax liability

The secretariat cannot see that the services from D fully take care of a function that characterizes the management of securities funds. As mentioned above, the Court of Justice of the European Union sets out a requirement for a “separate whole” that a subcontractor must be considered to supply tax-exempt management services. 

In this context, the Secretariat cannot see that the services from D are of the same independent nature, as was the case for the services assessed by the EU Court in decisions C-58/20, C-59/20 and C-275/11. In these cases, it was a question of specific analyzes and advice in relation to taxpayers’ funds, which were used as a basis for fund management without further assessment. The software from D, on the other hand, is understood by the secretariat as a tool where taxpayers themselves can generate background documentation and market data, which is then included in the taxpayers’ own assessments in relation to investments.

In this respect, the services from D are not of a similar independent nature, seen in relation to the tax-exempt administration, as the services that were assessed in the aforementioned cases from the EU Court of Justice. Based on this, the Secretariat cannot see that practice from the EU Court of Justice provides a basis for concluding that the index services sufficiently constitute a “separate whole”.

Nor can the secretariat see that the legal source material otherwise provides a basis for a further understanding of the condition “separate whole” than what can be derived from the above-mentioned judgments from the EU Court of Justice. In this context, it is also taken into account that a strict interpretation must be made as this concerns an exception to the general principle of tax liability in the case of services provided for remuneration, cf. among other things C-58/20 and C-59/20 (K and DBKAG) section 30.

The secretariat has subsequently come to the conclusion that the services from D do not meet the conditions set by the EU Court of Justice for considering subcontractors to supply tax-exempt management services, and that the same must be taken into account in the assessment according to the Value Added Tax Act § 3-6 letter f.

The service is therefore considered subject to tax.

Following this, it is the secretariat’s assessment that taxable persons were obliged to calculate output VAT by reverse charge of the purchased services from abroad, cf. the Value Added Tax Act cf. § 11-3, cf. § 3-30. 

7. The secretariat’s proposal for resolution

 

The complaint is partially upheld.

Post-calculated value added tax linked to the purchase of the service “[module 3]” is waived. 

 

Case record in the Tax Appeals Board Large department 01 – 30.08.2022

Present:

The Tax Appeal Board

                        Gudrun Bugge Andvord, manager

                        Benn Folkvord, deputy chairman

                        Elin Backer-Grøndahl, member

                        Ann Johnson, member

                        Rune Myrvold, member

 

Email from E Advokatfirma AS v/lawyer F was forwarded to the members of the tribunal on 23 August 2022.

The Tax Appeal Board’s handling of the case:

The tribunal divided into a majority and a minority. The majority, Andvord, Folkvord, Backer-Grøndahl and Myrvold agreed with the secretariat’s recommendation.

The minority Johnsen did not agree with the recommendation and has come to the conclusion, with doubts, that the taxpayer’s complaint should be upheld for more of the services to which the complaint applies than what the secretariat has proposed in its recommendation.

In cases C-58/20 and C-59/20 sections 37 and 38, the Court of Justice of the European Union takes the point of departure that the exception for the management of investment associations in the VAT directive Article 135 must be interpreted strictly. However, the Court adds that the principle of tax neutrality and the purpose of the exception – to facilitate small investors’ access to the market – argue that the exception must not be interpreted in such a way that it loses its effect. This seems to form the backdrop to the fact that the court must be said to interpret the exception relatively broadly, in any case so that the court-created condition of “separate whole” becomes less important when assessing subcontractors’ services separately.

The taxable services purchased by C have significant similarities with the services dealt with in the EU Court’s case C-58/20 and C-59/20. This does not only apply to the module “[module 3]”. On the basis of the considerations of purpose and principles of interpretation the EU Court of Justice has laid down, my conclusion is that the services from C must be considered to be specific and essential for the exempted management activities that the taxable person carries out. On the basis of what has been stated, I further assume that the services must be considered to be exclusively for use in such exempt business. I am therefore of the opinion that taxpayers should be considered for these services.

According to the information provided, the services provided by D provide the opportunity to retrieve and analyze information about potential investments. The services seem to be aimed at investment activities more generally, and will therefore not have such a connection to the exempt management activities that they are covered by the Value Added Tax Act § 3‑6 letter f. For these services, the complaint cannot be upheld.

The tribunal then found the following

decision:

The complaint is partially upheld by the fact that VAT is not calculated in the case of reverse settlement of the service « [module 3] ».

Source: skatteetaten.no