The Court of Justice of the European Union disregards the Danish VAT Act

By a new judgment about real estate investment companies the Court of Justice of the European Union once again sets aside Danish VAT practice. The judgment indicates a possibility of repayment of unduly levied VAT as well as savings in future.

Under the VAT rules the management of investment funds is exempt from VAT. In Denmark this exemption has so far been applied to value-based investment funds investing in securities etc, whereas real estate investment companies have not been regarded as investment funds. Therefore the management of real estate investment companies has been liable to VAT. It has been a disadvantage when such real estate investment companies have had VAT exempt business, in particular VAT exempt letting-out of premises for residential use.

Investment funds

In a Dutch case the Court of Justice of the European Union ("ECJ") was requested to express its position as to whether companies set up by several investors for the sole purpose of investing the assembled assets in immovable property could be regarded as a special investment fund for VAT purposes. The ECJ found that property investment companies may be regarded as investment funds for VAT purposes as the exemption from VAT is not limited according to its text, context or object to comprise only the undertakings for collective investment investing in securities.

However, the company must comply with the following conditions:

  • the company must display characteristics identical to undertakings for collective investment as defined by the UCITS Directive, including that the collective assets are to be invested based on the principle of risk-spreading; and
  • the company must be subject to specific supervision at national level.

Specific national supervision

The national supervision may either be regulated in harmonised EU Directives on in-vestment funds or it may be regulated in purely national legislation. The Court of Justice refers to the UCITS Directive, the FAIF Directive and the Directive on the activities and supervision of institutions for occupational retirement provision as examples of EU-regulated supervision rules.

Management services

The ECJ further expressed its position about which management services that are comprised by the exemption, in particular whether services relating to the actual operation of the company's properties may be comprised by the exemption. Services concerning the computing of the amount of income and the price of units or shares, the valuation of assets, accounting, the preparation of statements for the distribution of income etc have traditionally been exempt from VAT.

The ECJ concluded that also services comprising a property investment company's specific business are covered by the exemption, including services relating to the selection, purchase and sale of immovable property. However, services relating to the actual management of the company’s immovable property such as letting and management of existing tenancies, as well as delegation to other third parties and monitoring of maintenance works are not comprised by the exemption. Accordingly, such services are liable to VAT.

How Danish VAT practice is affected

The judgment sets aside Danish practice according to which, so far, property investment companies have not been regarded as investment funds. Therefore there is basis for property investment companies applying, through their suppliers, for repayment of unduly levied VAT on the management services covered by the judgment. This is relevant if the property investment company does not have a right to deduct VAT in full.

Normally there is a three-year time limit for the recovery of VAT. However, since this concerns a change in practice caused by a judgment, it is possible to go back to the tax period that tallies in part or in full with the period tried in the relevant case, but not more than ten years. In this situation the ten-year rule would apply. The deadline is calculated from the date when a request for repayment is submitted to the Danish Customs and Tax Administration (SKAT) and therefore lapses on a regular basis.

It must be expected that due to the judgment SKAT will publish guidelines specifying in more detail its importance to Danish practice. It will be interesting how the condition of national supervision is to be interpreted.

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