Analysis: “CJEU rules that the VAT exemption for financial services does not apply to management services supplied in relation to both special investment and other funds” by Jordi Sol
On 2 July 2020, the Court of Justice of the European Union (CJEU) ruled that a single supply of management services, provided by a software platform belonging to a third-party supplier for the benefit of a fund management company, which manages both special investment funds (SIFs) and other funds, does not fall within the VAT exemption for financial services (Article 135(1)(g) of the VAT Directive).
The facts in Blackrock Investment Management (UK) (C-231/19) are:
BlackRock Investment Management (UK) Ltd (BlackRock) manages both SIFs and other funds. To do this, Blackrock acquires the services of a US company (BFMI). BFMI uses an IT platform known as Aladdin which provides a broad range of investment management services, such as market analysis, monitoring performance, risk assessment, monitoring regulatory compliance and implementing transactions. By application of the reverse charge mechanism, BlackRock remitted the VAT in relation to those services, on the ground that such services should be VAT exempt (Article 135(1)(g) of the VAT Directive) however, it claimed a refund of the VAT paid from the tax authorities.
In the reasoning of the CJEU it is worth highlighting the following:
The CJEU considers the services supplied by BFMI to be a single supply which should follow the same VAT treatment without it being possible to differentiate its VAT treatment depending on its use (depending on whether the services are used for SIFs or for other funds).
In this context, as it is not under dispute that the services supplied to Blackrock were designed for the purpose of managing investments of various kinds and that, in particular, it may be used in the same way for the management of SIFs as for the management of other funds, so those services cannot be regarded as specifically for the management of SIFs. Therefore, the CJEU concluded that they should not fall within the scope of the VAT exemption.
The Advocate General (AG) Pikämae, in his Opinion on this case, agrees with the CJEU that the existence of a minority of SIFs, the management of which should be exempt, within a company that holds different funds, should not call for the taxable amount to be split and be subject to different VAT treatment (VAT exempt and not exempt). However, he leaves the door open to consider that, in circumstances other than those presented in this case, the VAT exemption for financial services could possibly be granted to services provided by a third party to a fund manager, in the scenario where the supplier of the services provides detailed data which enable the tax authority to identify precisely and objectively the services provided specifically for SIFs (point 71). In that event, the AG states, the services provided solely for SIFs may be exempt under Article 135(1) of the VAT Directive, provided that the supplier of the fund management services (or the recipient of those services in the case of a reverse charge) is able to provide the tax authority with those data, which would have the effect, for tax purposes, of treating similar situations objectively. Therefore, this Analysis considers that each case should still be assessed individually to determine whether the VAT exemption in Article 135(1)(g) of the VAT directive applies or not. Unfortunately, the CJEU did not cover this option.
Jordi Sol is an international VAT consultant and founder of VATinsights.