VAT – Circular confirms VAT exemption applicable to risk management services rendered to investment funds

The Luxembourg VAT legislation had been amended to include Alternative Investment Funds (AIFs) in the list of entities eligible to receive VAT exempt management services. A new Circular has been published by the Luxembourg VAT Authorities providing additional details on the services benefiting from this exemption (n°723ter dated November 7, 2013). This information is of prime importance since investment funds have in principle no VAT deduction right on their costs.

Following the implementation of the AIFM directive, AIFMs are required to ensure portfolio management as well as risk management functions. It had been clarified in the past that portfolio management services must be considered as VAT exempt management services. Circular n°723ter now confirms that risk management services also fall within the scope of the VAT exempt management services.

According to the AIFM Law, one of these two functions may be delegated by the AIFMs. In order to apply the VAT exemption on delegated risk management services, the criteria previously set out by the European Court of Justice (Abbey National case C-169/04 and GfBK C-275/11) remain applicable. Based on the Abbey National case, the application of the VAT exemption to delegated services requires that these services, viewed broadly, form a distinct whole, and are specific to, and essential for, the management of those funds. These conditions were made clearer by the Advocate General in the recent GfBk case.

This circular is welcome as it confirms the attractivity of Luxembourg for investment funds. Despite this positive confirmation, we however remind you that the drafting of risk management agreements must be given the utmost level of attention. A VAT review is imperative to ensure the application of the VAT exemption.

For further information, please contact Christophe Plainchamp .