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Funds exemption move could herald cost reductions

EUROPE - The European investment funds industry could see an overall reduction in costs for services related to the management of certain funds if an Opinion from the Advocate General is followed by the European Court of Justice (ECJ).

EU law allows for the management of special investment funds to be valued added tax (VAT) exempt. However, it is unclear whether the services that fall within ‘management’ could be determined by individual member states or whether it was an independent Community Law concept.

In a case brought by UK financial group Abbey National clarification was sought on this point. In addition, it was asked whether depositary, trustee and third party administration would qualify for exemption.

The Advocate General’s Opinion said that management is a Community Law concept and confirmed that depositary and third party administration services could fall within the scope of the exemption where certain tests were met.

At present the UK has a very narrow definition of the services that fall within the exemption for the management of special investment funds and if this reasoning is followed by the ECJ then the scope of exemption in the fund management industry will expand. In the UK special investment funds are currently limited to authorised unit trusts and open-ended investment companies.

Pauline Hawkes, indirect tax director at advisers Deloitte in London says: “If the ECJ follows the Advocate General’s Opinion the scope of exemption in the funds industry will widen which should result, overall, in reduced costs.

"This would provide some much needed guidance on the services falling within the management exemption. It would also bring the UK more in line with the scope of exemption in Europe, particularly Ireland and Luxembourg.”

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