Conditions for the application of the VAT exemption for management services under Article 43(1)(12) of the Value Added Tax Act

Pursuant to Article 43(1)(12)(a) of the VAT Act, management services of investment funds and collective securities portfolios – within the meaning of the provisions on investment funds – are exempt from tax. Pursuant to Article 43(1)(12)(b) of the VAT Act, services of managing investment portfolios of investment funds referred to in point (a) or part thereof are also exempt.

The general principle to be adopted when interpreting tax exemptions, which are an exception to the general principle of the universality of taxation, is to interpret strictly the legal basis for the application of tax exemptions. With this in mind, it should be pointed out that in order to apply the VAT exemption, the following conditions must be cumulatively met:

  1. the performance of activities constituting portfolio management services for investment funds or parts thereof,
  2. management services should relate to investment funds within the meaning of the Funds Act.
  1. First condition – Definition of management services.

Neither the VAT Act nor its implementing regulations currently contain a definition of management services, let alone a definition of ‘management of investment fund investment portfolios’ as referred to in Article 43(1)(12) of the VAT Act.

The management of investment funds is defined by Community legislation.

A distinction must be made between management services for investment funds and management services for alternative investment funds (hereinafter: AIC). Management services, depending on whether they concern investment funds or alternative investment funds, are subject to separate legal provisions under EU law, which define the scope of the notion of “management” differently in relation to these funds, which translates into the manner in which they are subject to VAT. It should be noted that the concept of “management” of funds is an autonomous concept of Community law, the content of which cannot be altered by a Member State.

Under Article 135(1)(g) of the VAT Directive, the management of special investment funds, as defined by Member States, is exempt from this tax.

In interpreting the concept of management in a way that is consistent with the objectives of the VAT Directive, judgments of the Court of Justice of the European Union (hereinafter: ‘CJEU‘) are helpful.

  • In his judgment of 21 October 2004 in Case c-8/03 (Banque Bruxelles Lambert S.A. (BBL) v. Belgian State), defining the above concept of management, the Advocate General emphasized: “Well, that objective requires that the exemption be defined in such a way that it does not infringe the principle of universality of the tax, without, however, rendering it pointless. are exemptable From that point of view, all transactions directly related to the trust fund management system are exemptable. By the same token, it cannot be extended to all services provided to collective investment undertakings which are in a situation such as that of mutual funds. In the trustee’s view, the transactions that are covered by the exemption should be limited to those that are closely related to the running of the fund, that is, to the determination of the investment policy, the purchase and sale of assets. While the exempted transactions are not limited to decision-making, they must directly relate to securities trading transactions. In order to apply the exemption, it must be established that the benefits in question are inextricably linked to the transactions directly exempted by the Sixth Directive. In contrast, benefits that are easily separable from fund management in the strict sense of the word should be considered taxable.”
  • This definition was further clarified by the CJEU in its judgment of 4 May 2006 in Case C-169/04 (Abbey National plc Inscape Investment Fund v. Commissioners of Customs & Excise), whereby the Court emphasised that it is an autonomous concept of Community law that cannot be amended by the Member States. It went on to point out that the notion of management of unit trusts referred to in that provision includes administrative management and fund accounting services provided by a third-party manager where, when assessed globally, they form a distinct whole and are specific and essential to the management of those funds.
  • In contrast, the subject of the CJEU’s ruling of 7 March 2013 in Case C-275/11 (GfBk Gesellschaft fur Borsenkommunikation mbH), was possible VAT exemption for advisory services provided by GfBk to an investment fund. The Court emphasised the need for a broad interpretation of the concept of the activity of ‘management of a special investment fund’ and stated: “the fact that advisory and information services are not listed in Annex II to Directive 85/611, as amended by Directive 2001/107, does not prevent them from falling within the category of specific services covered by the activity of ‘management’ of a special investment fund within the meaning of Article 13(B)(d)(6) of the Sixth Directive.” The fact that the advisory and information services provided by a third party do not involve any changes to the legal or financial situation of the fund does not preclude their inclusion within the concept of ‘management’ of a special investment fund within the meaning of Article 13B(d)(6) either. In this judgment, the Court clarified that the concept of management of special investment funds consists of a number of activities, must constitute a separate whole and must be relevant to the management process of such a fund. Also, the performance of these by a third party does not constitute an obstacle to exemption from VAT, as the most important thing is to link the supply to the management of the fund’s activities. As the concept of “management” of investment funds provided for in Article 135 of Directive 2006/112/EC, cited above, is an autonomous concept of Community law, it should therefore be defined from the point of view of Community law and its content cannot be changed.

The CJEU case law referred to thus shows that:

  • Member States may not develop their own definition of management for the purposes of this VAT exemption.
  • Hrnce, the concept of “fund management” comprises a range of activities also performed by entities other than fund managers. However, the criterion determining whether an activity can be included in the catalogue of “fund management” activities is its distinctiveness and relevance to the management of investment funds.
  • It is therefore essential in each case to demonstrate that the activities to be classified as fund management activities are specific to the activity of managing investment funds and form a distinct whole characterised by added value for the fund.

In summary, it is reasonable to assume that activities falling within the Community definition of investment fund management, provided on the basis of a contract concluded with an AIF Manager (hereinafter: AIFM), are exempt from VAT.

  1. Second condition – subjective.

Management services should relate to investment funds within the meaning of the Funds Act.

Pursuant to Article 3 of the Act on Funds, an investment fund is understood to be a legal person whose sole object of business is the investment of funds collected through a public, and in cases specified by the Act also non-public, offer to purchase participation units or investment certificates, in securities, money market instruments and other property rights specified by the Act.

An investment fund may operate as:

1) open-ended investment fund;

2) alternative investment fund: either a specialised open-ended investment fund or a closed-ended investment fund.

It should be pointed out that in accordance with the literal wording of Article 43(1)(12) of the VAT Act, the subjectivity of the entity providing the management service is irrelevant for the purposes of applying the exemption. Respectively, the VAT exemption applies to any entity providing management services of an investment fund’s portfolio or part thereof.


Ewa Lejman

Partner, Attorney at Law, Tax Advisor

Ewa Lejman