New VAT practice for unit trusts
The VAT exemption applying to management services provided to unit trusts will now be extended to include management services provided to pension funds. A number of management services that so far have been deemed to be subject to VAT will now become exempt from VAT. This is the result of the so-called ATP judgment in the case that Plesner conducted before the Court of Justice of the European Union and of the two sets of guidelines that the Danish Customs and Tax Administration (SKAT) has arranged to be going out for consultation. Yet another relaxation may be on its way if the Court of Justice of the European Union follows the Advocate-General's recommendation in a case involving the management of a real estate investment trust. It will consequently be possible to apply for the repayment of significant VAT amounts for previous years.
The management of unit trusts is exempt from VAT.In March 2014 the Court of Justice of the European Union passed its judgment in the so-called ATP case where the Court found that a pension fund is a unit trust in terms of VAT. The Court also found that the services that ATP PensionService provides to its customers may be deemed to be "management of unit trusts" exempt from VAT and "transactions relating to payments and transfers" exempt from VAT. It means that the stage is set for a significant amendment to Danish VAT practice.
The consequence of the judgment passed by the Court of Justice of the European Union was a settlement between ATP PensionService and the Danish Ministry of Taxation according to which ATP PensionService and ultimately the pension funds, which were ATP PensionService's customers, were entitled to repayments of significant VAT amounts from the Danish Customs and Tax Administration (SKAT).
As the judgment is of general public importance to a large number of other companies, the Danish Ministry of Taxation has given an account in a set of recently published guidelines of how the Danish Ministry of Taxation believes that the judgment passed by the Court of Justice of the European Union is to be construed. The account in the set of guidelines contains a more restrictive construction than what can immediately be deduced from the judgment passed by the Court of Justice of the European Union and it is doubtful whether the Court of Justice of the European Union will agree with the Danish Ministry of Taxation's construction.
It is true that the Danish Ministry of Taxation accepts that a pension fund or another pension provider can be deemed to be a "unit trust". However, the Danish Ministry of Taxation dismisses that the concept of management has been extended as the Ministry finds that the services provided by ATP PensionService may be included in the practice so far in respect of which services that may be deemed to be "management of unit trusts". Moreover, it is true that the Danish Ministry of Taxation accepts that "transactions relating to payments and transfers" have been extended, but the Ministry limits the transactions to services corresponding to services that ATP PensionService provided to PensionDanmark and the Ministry consequently fails to accept the principle expressed by the judgment passed by the Court of Justice of the European Union in this respect.
The Danish Ministry of Taxation has set the stage for a restrictive construction of the judgment and against such background we expect that there will be more cases about the right construction of the exemption from VAT in the light of the judgment.
The Danish Ministry of Taxation has also published a set of guidelines about the extensive construction of a "unit trust" in terms of VAT. The Ministry finds that three cumulative conditions must be met before the trust is a unit trust:
1. The investment institution's object must be collective investments.
2. The investment institution must invest in a number of different securities and/or liquid financial assets for the purpose of the diversification of risk.
3. The risk must be borne by the investor customers.
The set of guidelines seems to follow the principles of the two judgments (the ATP case and Wheels) which provide the basis for the amended Danish practice.
The deadline for responses to both sets of guidelines is 29 June 2015.
A new judgment passed by the Court of Justice of the European Union may also result in a significant amendment to Danish practice. This is the result of the Advocate-General's recommendation in a case before the Court of Justice of the European Union about a real estate investment trust.
The Advocate-General is of the opinion that a real estate investment trust is to be deemed to be a unit trust in terms of VAT if it meets the following criteria:
• The real estate investment trust must be subject to state supervision. It means that the real estate investment trust, as is the case for a traditional unit trust, must be subject to regulations, for instance the Directive on Undertakings for Collective Investment in Transferable Securities, UCITS, etc. For example, if the real estate investment trust is subject to the AIFM Directive, the condition has been met.
• The real estate investment trust must have been set up by more than one investor.
The Advocate-General also finds that management services such as letting of properties, administration of existing leases and the commencement and supervision of maintenance works are deemed to be management of unit trusts and that such services are consequently exempt from VAT. If the Court of Justice of the European Union follows the Advocate-General's recommendation, Danish practice will have to be amended once again. It is expected that the Court of Justice of the European Union will pass its judgment in the case in approximately three months.
Please do not hesitate to contact us for a discussion of the guidelines; we can also provide assistance with the drafting of responses.