JP Morgan Fleming Claverhouse Investment Trust plc and The Association of Investment Trust Companies v The Commissioners of HM Revenue and Customs.

• Jurisdiction: European Union
• Celex Number: 62005CC0363
• ECLI: ECLI:EU:C:2007:125
• Docket Number: C-363/05
• Court: Court of Justice (European Union)
• Procedure Type: Reference for a preliminary ruling
• Date: 01 March 2007

OPINION OF ADVOCATE GENERAL

KOKOTT

delivered on 1 March 2007 ¹(1)

Case C-363/05

JP Morgan Fleming Claverhouse Investment Trust plc

The Association of Investment Trust Companies

v

Commissioners of HM Revenue and Customs

(Reference for a preliminary ruling from the VAT and Duties Tribunal, London)

(Value added tax – Exemption of the management of special investment funds – Concept of ‘special investment funds as defined by Member States’ – Closed‑ended investment funds)

I – Introduction

1. Under the Sixth VAT Directive 77/388/EEC (‘the Sixth Directive), (2) the management of investment funds is exempt from VAT. In Abbey National, (3) the Court – likewise on a reference from the VAT and Duties Tribunal, London – has already specified what activities are covered by the concept of management of investment funds and under what conditions management services which third parties supply to a fund are to be exempted from VAT.

2. The Abbey National case concerned open‑ended funds constituted under trust law (authorised unit trusts – ‘AUTs’) and investment companies constituted under statute (open-ended investment companies – ‘OEICs’). In the present proceedings, the question now arises whether the exemption also applies to certain closed‑ended funds, namely investment trust companies (‘ITCs’). Open‑ended and closed‑ended funds are essentially distinguished by the fact that the capital of open‑ended funds varies through the issue and repurchase of shares by the fund, whereas the capital of closed‑ended funds is fixed.

3. The uncertainty regarding the treatment of ITCs results from the fact that the Sixth Directive refers to national law for the definition of a special investment fund entitled to exemption from VAT. Although there are general rules governing ITCs in the United Kingdom, ITCs do not enjoy exemption from VAT under national law. It must therefore be established how far the Member States’ powers of definition extend and what limits are placed on them in that regard by, in particular, the principle of the neutrality of VAT.

II – Legal context

A – Community law

4. Under Article 13(B) of the Sixth Directive,

‘Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

…

(d) the following transactions:

…

6. management of special investment funds as defined by Member States; …’

5. Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (4) harmonises the national rules for investment funds. Under the second indent of Article 1(2) of that directive, however, only open‑ended funds the units of which are, at the request of holders, repurchased or redeemed, directly or indirectly, out of those undertakings’ assets fall within its scope. Closed‑ended funds, by contrast, are expressly excluded from the scope of the directive (first indent of Article 2(1) of Directive 85/611).

B – National law

6. In the United Kingdom, the exemption laid down in the Sixth Directive for the management of investment funds and investment companies was implemented by Items 9 and 10 of Group 5 of Schedule 9 to the Value Added Tax Act 1994 (‘the VAT Act 1994’). The rules apply in particular to AUTs (Item 9) and OEICs (Item 10), but not to ITCs.

7. The provisions of the VAT Act 1994 as since amended refer for the definition of exempt undertakings to the provisions on collective investment schemes in Part XVII of the Financial Services and Markets Act 2000 (‘the FSMA’). The FSMA transposes Directive 85/611 into national law. ITCs are not collective investment schemes within the meaning of the FSMA. Unlike AUTs and OEICs, they do not need to be authorised as investment funds by the Financial Services Authority (‘the FSA’) but are regulated by it as the listing authority.

8. In order for a company to be recognised as an ITC within the meaning of income and corporation tax law, a number of conditions are set out in Section 842 of the Income and Corporation Taxes Act 1988. That provision is referred to in other legislation. In addition, the rules on investment companies laid down in the Companies Act 1985 also apply to ITCs.

III – Facts and questions referred for a preliminary ruling

9. ITCs are risk-spreading pooled investment vehicles which are listed as public limited companies on the stock exchange and invest in a portfolio of investments. The investors hold shares in the company. In contrast to AUTs and OEICs, the number of shares remains unchanged (subject to any increases in share capital). The investors have no right to have their shares repurchased by the company, unlike in the case of the other types of fund. Instead, where appropriate, they have to sell their shares on the stock exchange. The stock market value of the shares depends on supply and demand, the value of the ITC’s portfolio of investments being a significant, but not the only, factor in the valuation.

10. JP Morgan Fleming Claverhouse Investment Trust plc is an ITC. It receives supplies of management services in relation to its investments from a third party, JP Morgan Fleming Asset Management (UK) Limited, in respect of which it currently pays VAT. It appealed to the VAT and Duties Tribunal against the charge of VAT on the supplies of fund management which it receives. By order of 19 September 2005, the VAT and Duties Tribunal referred the following questions to the Court of Justice for a preliminary ruling:

‘(1) Are the words “special investment funds” in Article 13B(d)(6) of the Sixth Directive capable of including closed-ended investment funds, such as ITCs?

(2) If the answer to the first question is in the affirmative, does the phrase “as defined by Member States” in Article 13B(d)(6):

(a) allow Member States to select certain of the “special investment funds” within their jurisdiction to benefit from the exemption of the supply of management services and exclude others from the exemption, or

(b) does it mean that the Member States are to identify those funds within their jurisdiction which fall within the definition of “special investment funds” and that the benefit of exemption should extend to all such funds?

(3) If the answer to the second question is that Member States can select which “special investment funds” benefit from the exemption, how do the principles of fiscal neutrality, equal treatment and the prevention of distortion of competition affect the exercise of that discretion?

(4) Does Article 13B(d)(6) have direct effect?’

IV – Legal assessment

A – Preliminary observations

11. The concept of ‘management of special investment funds’ is not defined more precisely in Article 13B(d)(6) of the Sixth Directive itself. The phrase nevertheless contains two elements which require definition, namely ‘management ‘and ‘special investment funds’.

12. As the Court held in Abbey National, the definition of what constitutes management within the meaning of the abovementioned provision is a question solely of Community law. According to settled case‑law, the exemptions provided for in Article 13 of the Sixth Directive are in fact concepts of Community law whose purpose is to avoid divergences in the application of the VAT system from one Member State to another. (5)

13. According to the express wording of the Sixth Directive, it is, by contrast, for the Member States to define more precisely the special funds in question. In Abbey National the Court stated in this regard as follows:

‘While, consequently, the Member States may not alter their content, in particular in laying down conditions of application [meaning “of the Sixth Directive”], that cannot however be so where the Council has specifically conferred on them the task of defining certain terms of an exemption.’ (6)

14. That wording is misleading. The Court appears to allow the Member States discretion to alter the content of the Sixth Directive, which in general is the prerogative of the Community legislature.

15. What the Court must in fact have meant is that the Sixth Directive refers, in certain specified cases, to the more precise definition of a concept by the national legal systems and thus leaves it to the Member States to flesh out those concepts. Such references to national definitions are to be found in numerous places in the Sixth Directive. Thus, for example, it is for Member States to define the medical and paramedical professions whose services are to be exempt from VAT pursuant to Article 13A(1)(c) of the Sixth Directive. In addition, exemption for services supplied by public welfare or charitable organisations is dependent on the appropriate status having been conferred on them by Member States. (7)

16. It is true that, as a consequence of that legislative technique, the conditions for the application of the Sixth Directive may differ from Member State to Member State. It nevertheless creates, in spheres which the Community legislature has not harmonised down to the...