EUROPE: European Court of Juctice decision in Abbey VAT case

Friday May 5 2006

The European Court of Justice has delivered its opinion in the Abbey VAT case. The decision can be found at the above link. The ruling upholds the Opinion of the Advocate General delivered in September 2005.

In particular:

*`Management of special investment funds` extends to services performed by third parties in respect of the administrative management of funds, if, viewed broadly, they form a distinct whole, and are specific to, and essential for, the management of those funds. These services are, therefore, exempt from VAT.

*The functions of a depositary are not covered by the concept of management and are, therefore, subject to VAT. A point of potential interest is that the Court appears to be ruling that depositary services are not within the concept of management whereas the Advocate General’s Opinion was that this was a matter of fact to be determined in each case, albeit that it was the Advocate General’s stated view that such a determination would lead to the conclusion that services did not constitute `management`.

However, there remains uncertainty even after this decision as:

*each case of outsourcing by a Manager to third party administrators potentially falls to be considered on its own merits as regards whether the outsourced services `form a distinct whole, and are specific to, and essential for, the management of those funds` (and hence whether exempt from VAT or not);

*the European Commission has launched a consultation on Community legislation for VAT on financial services and has identified as among the current `problem areas` the issues of outsourcing, including of depositary activities.