A recent opinion of the Advocate General (AG) of the Court of Justice of the European Union (CJEU) suggests that the management of real estate investment trusts (REITs) and similar investment vehicles could be exempt from VAT. If the full Court agrees it will have significant ramifications for such trusts and their managers.
Background
In the case of Fiscale Eenheid X NV cs (case C-595/13), referred by the Dutch Supreme Court, the CJEU was asked to consider whether the management of three companies, established by a number of pension funds for the purposes of investing in real estate, fell within the exemption from VAT for the management of 'special investment funds' under Article 135(1)(g) of Council Directive 2006/112/EC.
The AG's opinion
The opinion of AG Juliane Kokott, released on 20 May 2015, is not yet available in English. Based on other language versions of the opinion, the AG believes such real estate companies are capable of falling within the meaning of 'special investment funds' as long as they are subject to regulation, eg under the UCITS Directive or under national regulations. If the opinion is followed by the CJEU, the management of REITs and other collective investment vehicles investing in real estate could be exempt from VAT.
What could this mean for UK REITs?
The management of REITs in the UK is currently subject to VAT at 20%. If it transpires that the management of REITs qualifies for exemption from VAT, it would clearly benefit those REITs which have invested in residential property or non-opted commercial property, ie properties where the rental income is VAT exempt.
These REITs – and other collective investment vehicles invested in similar properties - have little or no ability to recover VAT and so any VAT on management fees will be an absolute cost. These trusts should consider approaching their managers to discuss refunds of any VAT incorrectly charged on management fees. In turn, managers should be considering lodging claims with HMRC for refunds of this VAT. However, it should be noted that managers of REITs would no longer be entitled to recover input tax in respect of their management charges. As a result managers may seek to increase their fees.
What happens next?
Whilst an AG's opinion is often a good indicator of how a case may be finally decided, the CJEU's judgments can - and sometimes do - differ materially. As a result the full implications of this case will not be known until the final judgment is released, probably towards the end of this year.
In the meantime, REITs and similar investment vehicles that may be affected should seek advice and consider taking action now, in conjunction with their managers, to ensure they can take full advantage of any positive decision and to reduce the effects of the four year cap.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
