The German VAT provisions regarding the management of investment funds have been inadequate and subject to litigation for many years. In its latest decision concerning this matter dated 9 December 2015 (Case C-595/13; "Fiscale Eenheid"), the European Court of Justice ("ECJ") held that the management of real estate funds that are subject to specific State supervision fall within the scope of the VAT exemption under Union law. We reported on that decision in our Client Information dated 10 December 2015.
As of 1 January 2018, a new provision under the German VAT Act becomes effective with the purpose of implementing the ECJ's jurisprudence by "selectively extending" the scope of application of the relevant VAT exemption.
This Client Information summarizes the main details of the new provision under Sec. 4 No. 8 lit. h of the German VAT Act ("Sec. 4 no. 8 lit. h UStG (new version)") and the consequences in practice starting on 1 January 2018.
VAT Exemption for Management of AIFs Comparable to UCITS
According to Sec. 4 no. 8 lit. h German VAT Act (new version), the management of undertakings for collective investment in transferable securities ("UCITS") and of alternative investment funds ("AIF") comparable to UCITS is exempt from VAT.
The German legislature did not explicitly stipulate which types of AIF are "comparable" to UCITS and thus fall under the scope of application of Sec. 4 no. 8 lit. h German VAT Act (new version).
According to the explanatory memorandum, the following criteria must be met to find an AIF comparable to a UCITS:
a comparable specific State supervision; the same group of investors; the same competitive conditions; issuance of units/shares to multiple investors; dependence of the investment return on the performance of the investments made by the fund's manager ("AIFM") over the period during which the investors hold their shares/units; the investors' entitlement to distributions of the Fund's profits and to profits resulting from an increase in value of the fund shares/units as well as the exposure to the investment risk; and the investment of the funds raised in accordance with the principle of risk-spreading. From what we hear, the fiscal authorities take the position that the VAT exemption shall apply only if all of the above criteria are met. This view is taken in a draft administrative pronouncement concerning the VAT exemption which, however, is still subject to further consultation.