The European Court of Justice (ECJ) (Third Chamber) ruled that the concept of ‘management’ of special investment funds in art. 13(B)(d)(6) of Directive 77/388 (‘the sixth directive’) had its own independent meaning in Community law which could not be altered by the member states. The concept covered the services of a third party managing the administration of funds, if they broadly formed a distinct whole, and were specific to, and essential for, the management of those funds. On the other hand, it did not cover services corresponding to the functions of a depositary, such as those set out in art. 7(1) and (3) and 14(1) and (3) of Directive 85/611 (on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS)).

Facts

A reference to the ECJ was made in proceedings concerning the taxation of services supplied by the depositaries of a number of authorised unit trusts and of an open-ended investment company (OEIC), and administration and accounting services performed by a third company delegated by the management company of an OEIC. The OEIC Regulations required an OEIC to have at least one authorised corporate director (ACD), which had to be a body corporate approved and authorised to act as manager. Under the Financial Services and Markets Act 2000 and the Financial Services Authority's Collective Investment Schemes Sourcebook, the depositary of an authorised unit trust was described as a ‘trustee’ whereas under the OEIC Regulations, the depositary of an OEIC was referred to as a ‘depositary’.

The taxpayers were the managers of a number of authorised unit trusts. They charged a general fee for their trustee functions. An agreement was reached under which a third party (B) undertook to perform a raft of services, in particular computing 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, the provision of information and documentation for periodic accounts and tax, statistical and VAT returns, and the preparation of income forecasts. B also undertook to provide other services such as data processing, fund reconciliation, calculation and recording of charges and expenses, recording of corporate events, distribution of daily sub-fund prices to the press, production of tax and VAT returns and returns to the Bank of England, calculation of distribution rates and yields, and answers to enquiries from the taxpayers and/or the depositary.

The taxpayers complained that several of the trustees of authorised unit trusts managed by its subsidiaries and a depositary had wrongly claimed VAT in respect of their services. In addition, they challenged B's charge to VAT on the administration and accounting services that it supplied as fund administrator. The taxpayers contended that the services supplied by B were exempt from VAT because they constituted ‘management of special investment funds’ under art. 13(B)(d)(6) of the sixth directive. They also argued that the services, other than custody services, supplied by the trustees of an authorised unit trust and by the depositary of an OEIC were exempt under art. 13(B)(d)(6). Moreover, verification and decision-making functions performed by the depositary or the trustee were both comprised in management functions.

The VAT and Duties Tribunal took the view that the scope of the exemption contained in art. 13(B)(d)(6) was not clear and there was a disparity between the practices of the member states as to the treatment of the transactions at issue. Therefore it stayed the proceedings and referred to the ECJ for a preliminary ruling.

Issues

Whether the concept of ‘management’ of special investment funds in art. 13(B)(d)(6) had its own independent meaning in Community law whose content the member states might not alter; and whether the concept of ‘management of special investment funds’ covered the services charged for by a depositary pursuant to art. 7 and 14 of Directive 85/611, national regulatory provisions and the relevant fund rules and the administrative and accounting management services of the funds performed by a third party manager.

Decision

The ECJ (Third Chamber) held that the exemptions provided for in art. 13 of the sixth directive had their own independent meaning in Community law which had to be given a Community definition whose purpose was to avoid divergences in the application of the VAT system from one member state to another. While member states might not alter their content, in particular in laying down conditions of application, that could not be so where the EC Council had specifically conferred on them the task of defining certain terms of an exemption. Although art. 13(B)(d)(6) had conferred on member states the task of defining ‘special investment funds’, that task had not been extended to ‘management’ (EC v Ireland (Case C-358/97) [2000] ECR I-6301 applied). Article 13(B)(d)(6) covered special investment funds whatever their legal form. Undertakings for collective investment constituted under the law of contract or trust law, and those constituted under statute, both came within the scope of that provision. Neither the context nor the wording of art. 13(B)(d)(6) indicated that the legislature intended to limit its application only to undertakings for collective investment constituted under the law of contract or under trust law.

Since the exemptions referred to in art. 13 were exceptions to the general principle that VAT was to be levied on all services supplied for consideration by a taxable person, they should be interpreted strictly. Further, it followed from art. 1(2) of Directive 85/611 that the transactions carried out by UCITS consisted in the collective investment in transferable securities of capital raised from the public. With the capital provided by subscribers when they purchased shares, UCITS assembled and managed, on behalf of the subscribers and for a fee, portfolios consisting of transferable securities.

The purpose of the exemption, under art. 13(B)(d)(6), of transactions connected with the management of special investment funds was, particularly, to facilitate investment in securities for small investors by means of investment undertakings. It was intended to ensure that the common system of VAT was fiscally neutral as regards the choice between direct investment in securities and investment through undertakings for collective investment. It followed that the transactions covered by that exemption were those which were specific to the business of undertakings for collective investment.

Therefore, apart from portfolio management, the task of administering undertakings for collective investment, such as those set out in Annex II to Directive 85/611, which were functions specific to undertakings for collective investment, came within the scope of art. 13(B)(d)(6). On the other hand, that provision did not cover the functions of depositaries, such as those set out in art. 7(1) and (3) and 14(1) and (3) of Directive 85/611 since those functions were not under the management of undertakings for collective investment.

As regards the services performed by a third party manager in respect of the administrative management of the funds, it followed from the principle of fiscal neutrality that operators had to be able to choose the form of organisation which, from the strictly commercial point of view, best suited them, without running the risk of having their operations excluded from the exemption under art. 13(B)(d)(6).

Accordingly, management services performed by a third-party manager came, generally, within the scope of the article.

However, to be regarded as exempt transactions, services performed by a third party manager in respect of the administrative management of the funds had to form a distinct whole. Therefore services supplied had to concern specific essential elements of the management of special investment funds. Mere material or technical supplies, such as the making available of a system of information technology, were not covered by art. 13(B)(d)(6).

European Court of Justice (Third Chamber). Judgment delivered 4 May 2006.