The VAT Exemption for the Management of Special Investment Funds: Is it Time for a Change?

Stine Schmidt

Student thesis: Master thesis

Abstract

The primary objective of this thesis is to analyze and interpret the scope of the term “special investment funds” as it is stated in the VAT exemption for the management of special investment funds as defined by Member States in the provision in article 135(1)(g) of the VAT Directive (2006/112/EC), which has been implemented in the Danish VAT Law article 13(1)(11)(f). Moreover, the thesis will analyze the economic pros and cons of the VAT exemption and consider whether the exemption for the management of special investment funds is efficient. The common system of VAT is in general based on a principle of fiscal neutrality. A VAT exemption is an example of a breach of this principle, which is why breaches like these should be limited to as few as possible. The consequences of VAT exemption is no right to deduct input VAT, which might lead to a cascade effect where VAT is charged on an already paid VAT. Furthermore, a VAT exemption raises the problem of identifying the scope of the VAT exemption. The term “special investment funds” raises the problem of identifying the scope of this term, which is why this term is further analyzed based on the latest ruling by the European Court of Justice and the Danish implementation of these rulings. According to the European Court of Justice investment undertakings must be under specific State supervision, be a collective undertaking, invest by a principle of risk-spreading and investors in the investment undertaking must bear the risk of the investments to be under the scope of the term “special investment funds”. The purpose of the VAT exemption is to facilitate investment in securities by means of investment undertakings by excluding the cost of VAT. However, it seems that the cost of VAT is not excluded by a VAT exemption rather it can lead to a cascading of the VAT. Because of this, four different methods is analyzed, to examine if one of these could be used to let the management of special investment funds be subject to VAT. Two of the methods are based on a cash-flow system in which cash in-flow is considered as sales with output VAT and cash out-flow is considered as a purchase with input VAT. The two methods are administratively costly which is why two other methods are considered applicable. 0-rating business-to-business transactions or an option to tax for the businesses. The latter method is compatible with the current VAT system and easy to implement. Due to the purpose of the VAT exemption and the difficulties of identifying the scope of the term “special investment funds”, it is considered if it is now time for a review of the VAT exemption.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2016
Number of pages109