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VAT on Fund Management - a changing European landscape Back  
Niall Campbell comments on where Ireland sits in a changing European VAT landscape with regard to choice of fund management location.
In theory, one would expect the common EU VAT legislation to ensure there is a level playing field between all EU Member States with regard to VAT. This is not always the case. There are a number of differences in the way in which Member States implement EU law into their domestic legislation and different tax authorities can also take different interpretations in practice. Such discrepancies are evident in the area of fund management, where Ireland applies one of the more favourable regimes which supports the continued attractiveness of Ireland as centre of excellence in the fund administration industry.

How does Ireland compare?
In summary, the VAT treatment of fund administration services provided from Ireland is as follows:

• Charges for fund administration services provided to non Irish domiciled funds are outside the scope of Irish VAT.
• VAT exemption applies to the management and administration of specified Irish domiciled funds. Although VAT exemption has always been applied, legislation enacted in 2004 clarified the scope of services covered by the exemption.
• It is possible for Irish fund administrators and Irish domiciled funds to recover a proportion of the Irish VAT which they may incur on domestic and overseas services.

While the above seems relatively straightforward and we have become accustomed to the legislation and practice in Ireland it is worth noting the following points of difference with other EU Member States:

- VAT exemption in Ireland applies to the management of a wide range of specified Irish domiciled collective investment undertakings and other special investment schemes (including Section 110 vehicles). This is more favourable than the UK, where exemption has traditionally only applied to a narrower range of equivalent UK funds.
- The scope of the services to which VAT exemption applies is defined more broadly in Ireland than in certain other EU Member States.
- There have been a number of important ECJ decisions in recent years for the funds management industry (Abbey National, BBL and JP Morgan Claverhouse). Most of these cases confirmed the position which has been applied in Ireland, and hence did not cause much market reaction. This was not the case in jurisdictions such as the UK and Luxembourg where these decisions gave rise to considerable uncertainty in the marketplace. The BBL case has caused a significant change in Luxembourg where funds are now required to register and account for VAT on services received from abroad (like in Ireland) but without the same VAT recovery regime which is applied here.
- The VAT recovery entitlement for Irish fund administrators and Irish funds is applied in a more favourable manner than in certain other EU Member States.

Towards a level playing pitch?
One of the impacts of the recent wave of case law is that there is now increasing evidence of more harmonisation and a resulting levelling of the playing pitch in terms of VAT treatment of different EU fund locations.

For example, prompted by the JP Morgan Claverhouse case, the UK has broadened significantly the range of entities to which the fund management VAT exemption applies. This has had the result of making these UK funds more attractive.

Similarly, changes in France have aligned the treatment of the two principal types of funds, SICAVs and FCPs whereby management fees in respect of both funds are now considered VAT exempt. France has also amended its provisions for opting to tax such services - such a right was previously available on an irrevocable basis to FCPs. A more flexible, and therefore more attractive, regime is now available whereby the option to tax can be revoked after 5 years.

However, while there are many areas where legislation and practice are converging, there are still some areas where certain fund locations are making life difficult for themselves. A good example is the attempt by HMRC to treat offshore funds which are managed by UK based fund managers as being based in the UK, which would not be welcomed by those considering the UK as a service location.

The EU Commission proposals
As part of a wider review of VAT and financial services, the European Commission is currently bringing forward proposals to amend EU wide VAT legislation relating to funds and funds management. If implemented as the Commission would like, the new rules would harmonise a number of areas such as the scope of services and the type of funds to which VAT exemption can apply. As there are a number of issues which still need to be dealt with before the Commission proposals will be accepted, the best current estimate is that no revised VAT and financial services regimes will be in place before 2011.

In the meantime, by continuing with the helpful and pragmatic approach adopted by Irish Revenue and Department of Finance in the past, the Irish fund administration industry should continue to benefit from current VAT legislation and practice.

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