Irish Pensions Magazine Spring 2014
18
News
Therefore, pension funds, for the most part, pay
VAT on investment management fees, which can
be significant. While a part of the investment
management charge may be exempt from VAT i.e.
the execution of stock/share transactions a decision
given by the CJEU in the case of Deutsche Bank
may impact on this. In the Deutsche Bank case
the CJEU ruled that portfolio management services
which included an execution element together with
a management/advisory function was subject to
VAT on the full consideration as the management/
advisory part was the main element of the service
that the customer required notwithstanding that the
execution piece on its own account could be exempt
from VAT.
As pension funds engage, for the most part, in VAT
exempt investment activities, they can have limited,
if any, VAT recovery. However, a right of recovery
does exist, based on the percentage of non-EU
investment disposals in the pension funds so each
year pension funds should be reviewing their
portfolios (and specifically the quantum of non-EU
investment disposals) to determine if any VAT can
be reclaimed.
With an ageing population in Europe and a clear
aim of encouraging citizens to provide for their
retirement, there has been much focus in recent
years on whether the fund management exemption
should extend to pension funds and based on
the rationale for exempting fund management as
outlined above it would not seem illogical that the
exemption should extend to pension funds.
As referred to in our last article, an EU-wide
review of VAT and Financial Services commenced
in 2005 with a view to updating the current list of
VAT exemptions for financial services (banking,
investment management and insurance). Originally,
it was envisaged that the VAT exemptions would be
updated by way of a new Directive and Regulation.
In the investment management area, a key aspect of
the review was the inclusion of a specific exemption
for pension fund management. Had the review been
concluded with the inclusion of such an exemption,
this would have led the way to exemption for the
management of Irish pension funds. However,
after many years of negotiations and numerous
versions of the draft directive being considered, the
review appears to have stalled, without meaningful
agreement and with no real sense of when (if ever)
it will be finalised.
Therefore, unfortunately, it would appear that we
are, in effect, “stuck” with the legislation currently
in place (at EU level) and we must look to recent
ECJ judgements to consider whether pension fund
management can be exempted, based on the Court’s
interpretation of the legislation as currently drafted.
Wheels Case C 424/11 – VAT Exemption
defined benefit funds
On 7 March last year, the ECJ delivered its judgement
in Wheels.
This case dealt with the VAT exemption for the
“management of special investment funds as defined
by Member States” and the scope of Member States’
discretion in determining which fund types may be
included in their domestic legislation, particularly
whether the UK legislation which excluded (defined
benefit) pension funds was contrary to EU VAT law.
In summary, the ECJ ruled that (defined benefit)
pension funds should not be included in the
definition of “special investment funds” for the
purposes of the fund management exemption.
The ECJ held that an investment fund in which the
assets of a retirement pension scheme are pooled
(i.e. as in the case of Wheels) could not be regarded
as a collective investment undertaking within the
meaning of the UCITS Directive as it is not open to
the public but instead constitutes an employment-
related benefit which employers grant (only) to their
employees. Therefore, such a fund is not identical
to funds that constitute ‘special investment funds’
within the meaning of the fund management
exemption. Nor is such an investment fund
sufficiently comparable with collective investment
undertakings as defined by the UCITS Directive to
be in competition with them.
The Irish fund management exemption currently
precludes pension funds (both defined benefit and
defined contribution, except in the case of unitised
funds or unit trust schemes established solely for
the purpose of superannuation fund schemes ). On
the basis of the judgement in the Wheels case, it
would appear that our legislation is in accordance
with EU VAT law and that Irish (defined benefit)
pension funds are correct to self-account for
VAT on a reverse charge basis on the investment
management charges received from non-Irish
entities (and indeed pay VAT on Irish investment
management charges).
Interestingly, the case only dealt with defined
benefit (DB) schemes and not defined contribution
(DC) schemes.
PPG (Case C 26/12) – VAT Recovery Op-
portunity for Employers?
In this case, the ECJ held that an employer who
has set up a pension fund in the form of a legally
and fiscally separate entity in order to safeguard
the pension rights of his employees and former
employees, is entitled to deduct the VAT he has
paid on services relating to the management and
operation of that fund, provided that the existence
of a direct and immediate link is apparent from all
the circumstances of the transactions in question.
Previously, the Irish Revenue would not grant a right
of deduction in respect of the “management” of a
pension fund assets. However, deduction would be
given for the set up costs of the fund provided the
employer incurred the costs.
On the basis of the judgement, we believe that
there may be an opportunity for employers to either
