Sean Portellli The scope of the ‘pure’ VAT exemptions and their interpretation by the CJEU, with particular reference to the services referred to in article 135(1)(g) of Directive 2006/112EC, as well as the provisions’ transposition into Maltese law.
Sean Portelli graduated from the University of Malta with a secondclass Bachelor of Laws (Hons) degree, and is currently reading for the Master of Advocacy at the same university. He is mainly interested in the financial and technological fields of law. Sean Portelli was elected to serve as Treasurer of the Malta Law Students’ Society (GħSL) during the 2019/20 term of office.
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This article analyses the exemptions provided for by the VAT Directive, these being categorised into two separate groups, concerning Articles 132 through to 134, as well as Articles 135 through to 137 of the VAT Directive, respectively. Moreover, in order to fully understand the applicability of the exemption provided for by the VAT Directive, the work examines the exemptions from the perspective of the Court of Justice of the European Union. Simultaneously, the work shall methodically scrutinise the caselaw of the Court of Justice of the European Union concerning Article 135(1)(g) of the VAT Directive, whilst further examining the transposition of the same into the Maltese legislative framework, under the VAT Act.
1. Introduction
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t is indisputable to state that Value Added Tax (‘VAT’), is a general tax imposed upon consumption, that is indirectly applied by means of taxing the supply of goods or services for consideration, at every stage of production and distribution.1 The general nature of VAT indicates that every form of economic activity is to be included within its remit, without showing discrimination as to the nature of the taxable person that is involved in the supply of goods and services.
2. The Exemptions Prescribed by the VAT Directive From a practical point of view, the justification of VAT exemptions may be brought about through three distinct methods. Firstly, certain exemptions may be implemented so as to build upon VAT’s advancement. Secondly, certain goods and services deserve to be tax exempt. Thirdly, distinct categories of goods and services may prove too burdensome to tax. The application of an exemption carries, with it, certain consequences. In fact, any input tax which is attributed to an exempt supply cannot be deducted.2 1 Council Directive (EU) 2006/112 of 28 November 2006 on the common system of value added tax (2006) OJ l347/1 2 Ben Terra and Julie Kajus, ‘A Guide to the European VAT Directives, Volume 1’ (2006,
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The VAT Directive3 categorises exemptions without deduction into two separate groups. The first group concerns activities which are exempted in the interest of the general public, whilst the second group concerns other forms of exempted activities.4 The first group is covered by Articles 132 through to 134 of the VAT Directive, and it is comprised of, amongst others, medical, educative, sport, cultural, and social services. Such transactions are generally carried out by public bodies; however, the exemption also covers a number of the same transactions performed in the interest of the general public by either the private sector, or by the voluntary sector. 5 The second group is covered by Articles 135 through to 137 of the VAT Directive, and it allows for exemptions which include amongst others, insurance and reinsurance transactions, the leasing and letting of immovable property, banking and financial transactions, as well as investment funds.6 Such exemptions concern a varied array of transactions, which are mostly related to money and finance.7
3. The Exemptions from the Lens of the Court of Justice of the European Union In order to fully understand the applicability of the VAT Directive’s exemptions, it is fundamental to refer to the interpretations made, in the vast body of case-law of the Court of Justice of the European Union (the ‘CJEU’). Furthermore, due to the fact that exemptions are an exception to the general VAT rule that all supplies of goods or services are subject to VAT, they shall be interpreted very strictly. As a matter of fact, excluding what is included in the VAT Directive, there are no thorough definitions of the services covered, IBFD Publications) 3 Council Directive (EU) 2006/112 of 28 November 2006 on the common system of value added tax (2006) OJ l347/1 4 Ibid 5 European Commission, ‘Exemptions without the right to deduct’ <https://ec.europa.eu/taxation_customs/business/vat/eu-vat-rules-topic/exemptions/exemptions-without-right-deduct_en#fin_insur_services> accessed 19 April 2019 6 Ben Terra and Julie Kajus, ‘A Guide to the European VAT Directives, Volume 1’ (2006, IBFD Publications) 7 European Commission, ‘Exemptions without the right to deduct’ <https://ec.europa.eu/taxation_customs/business/vat/eu-vat-rules-topic/exemptions/exemptions-without-right-deduct_en#fin_insur_services> accessed 19 April 2019
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nor are there any unambiguous references made to definitions used in other sets of Community legislation or by any regulatory bodies. This lack of meticulousness has plagued tax authorities and commercial activities with problems in interpreting both the scope and the application of such exemptions. This phenomenon is illustrated in the growing body of CJEU case-law. Moreover, the CJEU has often been requested to fill in such voids, as well as to clarify the correct understanding of the current exemptions in the VAT Directive. Thus, an analysis of the CJEU’s interpretation on the exemptions provided in the VAT Directive, should essentially consider both the exemptions related to activities conducted in the public interest, as well as any exemptions related to money and finance, which shall be specifically dealt with later on. As aforementioned, activities in the interest of the general public, including, amongst others, the supply of organs, blood, and milk, as well as hospital and medical care, including other closely related activities are exempt from VAT. The Court, in De Fruytier,8 was tasked with determining whether Nathalie De Fruytier’s activity, in transporting human organs is exempt from VAT under Article 132(1)(d) of the Directive, as the Directive exempts the supply of human organs, blood and milk from VAT. The Court held that ‘the terms used to specify the exemptions in Article 132 of Directive 2006/112 are to be interpreted strictly, since they constitute exceptions to the general principle’9 which requires VAT to be charged on the supply of goods and services for consideration. The Court further held that ‘the requirement of strict interpretation does not mean that the terms used to specify the exemptions referred to in Article 132 should be construed in such a way as to deprive the exemptions of their intended effect’.10 The Court thus held that physically transporting the goods concerned from one location to another for hospitals or laboratories does not fit the notion of the supply of goods as prescribed by the VAT Directive, since the person transporting the goods is not disposing of them as the owner, and therefore, such an activity cannot qualify for the VAT exemption under Article 8 Case C-86/09, Future Health Technologies Limited v The Commission for Her Majesty’s Revenue and Customs [2010] 9 Ibid 10 Ibid
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132(1)(d). One may note that the Court has taken an active role in formulating guiding principles as a means to interpret the exemptions provided by the VAT Directive. The second group of exemptions has also been heavily dealt with by the Court. In Velvet & Steel, the Court had to determine whether Article 135(1)(c) of the VAT Directive included within its scope non-pecuniary obligations, such as the requirement to refurbish a property. The Court held that the exemption concerned the assumption of obligations, as well as the negotiation, assumption and management of credit guarantees, and any other form of security for consideration. Furthermore, the Court held that such transactions are essentially financial services. In light of this, the Court held that the assumption of an obligation to have a building renovated is not to be considered as a financial service in accordance with Article 135(1)(c) of the VAT Directive, and thus, it falls outside the remit of the provision. The Court further held that such an interpretation is reinforced by the purpose for which financial transactions are exempted from VAT, and such purpose is tied with lessening the burdens associated with the determination of the tax base, and of the amount of deductible VAT, as well as to prevent an increase in costs. Therefore, the Court decided that subjecting the assumption of an obligation to have property renovated to VAT does not create complications which require the transaction to be exempted, and thus such an obligation is subject to VAT.
4. The CJEU’s Interpretation of Article 135(1)(g) of the VAT Directive The EU’s common VAT system has, since the Sixth VAT Directives’ adoption, virtually exempted the most common categories of financial services, notably insurance and the management of investment funds. Such exemptions are linked with the general fact that the process of taxing financial services is burdensome, technical and extremely complex.11 Thus, this work shall give 11 Accompanying document to the Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax, as regards the treatment of insurance
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specific attention to Article 135(1)(g) of the VAT Directive concerning the exemption from VAT of transactions related to the ‘management of special investment funds’.12 Fiscale Eenheid13 centred around a management company providing portfolio management and property management services. The management company took the position that these services qualified for the VAT exemption, which was met by disagreement with Netherlands tax authorities, and thus, the case was submitted to the CJEU. The Dutch authorities questioned whether an investment vehicle which solely invests in real estate, could also meet the requirements of a qualifying investment fund for the purpose of the exemption, as opposed to a UCITS fund. The Dutch authorities further questioned whether property management qualifies as exempt fund management. The CJEU held that, if subjected to specific State supervision, real estate investment funds can qualify for the VAT exemption, however property management does not. The CJEU did not, however, define what the term ‘specific State supervision’ entailed. The ruling in Fiscale Eenheid is significant as it could either increase or reduce the VAT expenses of managing investment funds or pools. The Court ruled that investment funds, real estate funds, and other non-UCITS funds are entitled to the exemption provided under Article 135(1)(g) if they are subjected to specific State supervision. In GfBk Gesellschaft,14 the CJEU established that investment advisory services also fall within the remit of the VAT exemption provided in Article 135(1)(g) of the VAT Directive. The case concerned a German investment manager, GfBk Gesellschaft, which provided fund management advise as a service to the fund manager for consideration. However, the German tax authorities believed that the advisory services provided by GfBk Gesellschaft did not fall under the remit of the exemption for fund management. In its judgement, the CJEU held that management services which are and financial services [2008] SEC (2007) 1554 12 Council Directive (EU) 2006/112 of 28 November 2006 on the common system of value added tax (2006) OJ l347/1 13 Case C‑595/13, Staatssecretaris van Financiën v Fiscale Eenheid X NV cs [2015] 14 Case C‑275/11, GfBk Gesellschaft für Börsenkommunikation mbH v Finanzamt Bayreuth [2013]
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provided by a third-party manager fall within the scope of the exemptions provided by the VAT Directive, as the management of special investment funds is determined in accordance with the nature of the services provided, and not by the person that is either supplying or receiving the service. Thus, in order to determine whether the advisory services provided, fall within the scope of ‘management of special investment funds’15, the CJEU held that one must determine whether the said advisory service is ‘intrinsically connected to the activity characteristic of an [Investment Management Company], so that it has the effect of performing the specific and essential functions of management of a special investment fund’.16 The CJEU held that advisory services which concern investments in transferable securities provided by a third party to an investment management company fall within the remit of Article 135(1)(g) of the VAT Directive. In GfBk Gesellschaft, the CJEU also made reference to the Abbey National17 case, in which the Court had stretched the exemption to functions for managing collective investment undertakings such as those which are provided for under the UCITS Directive. However, in GfBk Gesellschaft, the Court’s decision went further, and added that the exemption also applies to investment advisory services, albeit the fact that they are not considered as core services under the UCITS Directive.18 The case in Wheels Common Investment Fund19 concerned the VAT Directive’s treatment of management fees that are charged to a pension fund. The facts of the case centred on pension schemes provided to a category of former employees. Fund managers were appointed so as to manage the fund’s assets. The CJEU was asked whether assets of a retirement pension scheme, and the investment fund through which they are collectively pooled, fit the requirements of the exemption under Article 135(1)(g) of the 15 Council Directive (EU) 2006/112 of 28 November 2006 on the common system of value added tax (2006) OJ l347/1 16 Case C‑275/11, GfBk Gesellschaft für Börsenkommunikation mbH v Finanzamt Bayreuth [2013] 17 Case C-169/04, Abbey National plc, Inscape Investment Fund v Commissioners of Customs & Excise [2006] 18 Case C‑275/11, GfBk Gesellschaft für Börsenkommunikation mbH v Finanzamt Bayreuth [2013] 19 Case C-424/11, Wheels Common Investment Fund Trustees Ltd and others v Commissioners for Her Majesty’s Revenue and Customs [2013]
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VAT Directive.20 The CJEU remarked that under the VAT Directive, Member States are given discretion to determine the meaning of the term special investment funds, however the Member State is restricted from choosing which category of fund is entitled to the exemption and which category is not.21 The power given to the Member State in this scenario is that of defining within its respective laws, the funds that fit into the remit of Article 135(1)(g). Thus, in Wheels Common Investment Fund, the CJEU took it upon itself to determine whether an investment fund under which assets of a retirement pension scheme are pooled, match funds which are indistinguishable from, or comparable to special investment funds. In its deliberation, the Court held that special investment funds are funds which are comprised of undertakings for collective investments in transferable securities as provided for by the UCITS Directive.22 Nevertheless, an investment fund under which the assets of a retirement pension scheme are collectively pooled must not be considered to be a collective investment scheme under the UCITS Directive. Thus, such a fund cannot be considered to be equal or identical to fund which constitute special investment funds. The CJEU, in its judgement, held that such a scheme, is a measure through which the employer complies with his obligation towards his employees, and thus, the fund pooling assets of the retirement pension scheme is not a special investment fund, and therefore is not VAT exempt.23 Reference should also be made to the case of ATP PensionService24, in which ATP provided services to pension funds. In its judgement, the CJEU had to determine whether a defined contribution pension scheme was to be regarded as a special investment fund in line with Article 135(1)(g) of the VAT Directive, and if such was the case, the CJEU had to also determine whether the services ATP provided should be considered as management. The CJEU provided that Member State discretion to define special investment funds, under Article 135(1)(g) was restricted by the principle of 20 Ibid 21 Ibid 22 Ibid 23 Case C-424/11, Wheels Common Investment Fund Trustees Ltd and others v Commissioners for Her Majestyâ&#x20AC;&#x2122;s Revenue and Customs [2013] 24 Case Câ&#x20AC;&#x2018;464/12, ATP PensionService A/S v Skatteministeriet [2014]
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fiscal neutrality.25 Furthermore, the CJEU held that the defining element of a special investment fund is asset pooling, which in turn, allows for the diversification of the beneficiaries risks. ATP PensionService was contrasted with the decision in Wheels Common Investment Fund, under which the CJEU decided that a common investment fund which collectively pooled assets of a defined benefit pension scheme was not to be considered as a special investment fund, meaning that any supplied management services were not exempt from VAT. Moreover, the CJEU further provided that the VAT Directive did not dismiss the management of special investment funds from being separated into individual services, each of which having the ability to fall within the remit of the VAT exemption. Finally, in its judgement, the CJEU concluded that: pension funds such as those at issue in the main proceedings may fall within the scope of that provision if they are funded by the persons to whom the retirement benefit is to be paid, if the funds are invested using a risk-spreading principle, and if the pension customers bear the investment risk.26 The above case law is of paramount importance in the interpretation of Article 135(1)(g) of the VAT Directive, as it allows for increased workability in dealing with the VAT treatment of funds.
5. The Transposition of Article 135(1)(g) into Maltese Law The exemptions provided under the Value Added Tax Act (the â&#x20AC;&#x2DC;VAT Actâ&#x20AC;&#x2122;) are exceptions to the general principle that all supplies of goods or services are subject to VAT and, as the CJEU has reaffirmed, in multiple instances, such exemptions must be construed strictly. This infers that the exemption at hand is to solely apply to what it was intended to apply towards. Malta has implemented Article 135(1)(g) of the VAT Directive into the VAT Act, under Item 3(6) of Part 2 of the Fifth Schedule, as an exemption without 25 26
Ibid, para 42 Ibid
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credit. The effect of this is that goods and services purchased by consumers are untaxed, and thus, no VAT is charged on the value of the supply, and in turn, the supplier is not eligible to claim back any input VAT sustained in providing that supply, as businesses carrying out VAT exempt transactions are not eligible to recuperate input VAT. The VAT Act provides that ‘the supply of services consisting of the management of any investment scheme, provided that these services are limited to those activities that are specific to and essential for the core activity of the scheme’.27 Moreover, the VAT Act, also determines, for the purposes of the exemption, what fits the requirement of an ‘investment scheme’, and what category of service fits the requirement of ‘management services’. The VAT Act provides for four categories of ‘investment scheme’, notably, ‘collective investment schemes’, ‘retirement schemes’, ‘securitisation vehicles’, as well as ‘authorised reinsurance special purpose vehicles’. Thus, the concept of ‘investment scheme’ requires one to look at the legislation tied to the various schemes which fall under the exemption. For instance, let us consider ‘collective investment schemes’. In this case, the VAT Act makes reference to its definition under the Investment Services Act. Thus, if the ‘investment scheme’ satisfies the required conditions for a ‘collective investment scheme’, under the Investment Services Act, it will qualify for the VAT exemption under the VAT Act. This applies to the other listed forms of investment schemes under the VAT Act. Moreover, both the VAT Act and the VAT Directive fail to define the term ‘management’. However, it is implied, under the VAT Act, that ‘management’ includes within its remit, services, linked to the core activity of the scheme.28
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Value Added Tax Act, Chapter 406 of the Laws of Malta, Item 3(6), Part 2, Fifth SchedIbid, Item 3(6), Part 2, Fifth Schedule
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6. Conclusion Thus, as demonstrated above, the exemptions provided by the VAT Directive establish independent notions of EU law which aim to harmonise the various systems of VAT by attempting to lessen any deviations from the general rule that VAT is a wide-ranging tax imposed upon consumption, that is applied indirectly by taxing the supply of goods or services for consideration at every stage of production and distribution.
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