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It walks like a mutual fund, talks like a mutual fund, but is it a mutual fund?

It walks like a mutual fund, talks like a mutual fund, but is it a mutual fund?

An important decision from the European Court of Justice (ECJ) inLuxembourgdated March 3, 2013 (C-424/11) may have an impact beyond the VAT issue which was the reason for the submission of the matter to the ECJ by the U.K. Tax court.

The case involved the Trustee of various Ford Motor Company pension funds, waggishly named “Wheels”. Wheels was the trustee of a fund pooling for investment purposes the assets of  Ford’s occupational pension schemes.

Pursuant to article 13 B d) point 6 of the EU 6th Directive (as amended from January 1, 2007), “the management of special investment funds, as defined by the Member States” is exempted from VAT.

Following the ECJ decision of June 28, 2007 (C-363/05, JP Morgan Fleming Claverhouse Investment Trust), Wheels had sought to obtain the reimbursement of the VAT which had been charged and paid on services rendered by an investment manager, Capital International Limited, on behalf of various Ford motors pension funds. The Claverhouse decision had extended the exemption to collective investment schemes organised in theUnited Kingdomas OEICs and AUTs as well as closed end investment schemes.

The UK Revenue commissioners refused and the U.K. Tax Court referred the matter to the ECJ for a preliminary ruling.

The issue was whether the Pension Fund  held by Wheels could be characterised as a “special investment fund” within the meaning of the exemption mentioned in article 13 B d) above.

The ECJ first pointed out that whereas a degree of uniformity was required in some circumstances, when the EU legislation has conferred upon each of the Member States the task of defining certain terms (as here) it is up to the Member States to define the meaning of “special investment funds”.

The ECJ qualified the liberty granted to each of the Member States by pointing out that this power cannot be used to undermine the very bases of the exemption, which were to facilitate and encourage investment in collective investment schemes and to maintain fiscal neutrality for comparative activities, and it cannot select from among its “special investment funds” (as determined by domestic law) those which are exempted and those which are not.

EachMemberState’s power is thus restricted to the initial classification of “special investment funds”. This power is in turn moderated by the requirement that such choices maintain fiscal neutrality and do not treat differently economic operators carrying out the same or similar transactions.

The issue was therefore whether a pooled pension scheme was in fact in competition with “special investment funds” within the meaning of article13B (d)(6) of the 6th directive and article 135(1)g of Directive 2006/112 (point 15).

The ECJ stated that funds governed by the UCITS Directive were  such « special investment funds » able to rely on the VAT exemption, UCITS being collective investment undertakings having as their sole object the collective investment of capital raised from the public. Similarly, the exemption could apply to non UCITS funds which display characteristics identical to UCITS and carry out transactions comparable, or at least in competition with UCITS; such funds may also qualify as “special investment funds”.

The ECJ found several grounds to distinguish a pooled retirement pension scheme from “special investment funds”.

Firstly, the beneficiaries of the scheme, unlike private investors, do not bear the risk arising from the management of the fund; the benefits to which a scheme member is entitled depends not upon the value of the funds’ assets but on a pre-determined amount calculated as a function of length of service and salary (point 27).

The Court also held that such a retirement pension scheme differed from a collective investment scheme (qualifying as a “special investment fund”) insofar as the contributions made by the “employers” were simply a means whereby they comply with their legal obligations towards the employees (point 28).

In its preliminary ruling the Court thus found that an investment fund pooling the assets of a retirement pension scheme, where the members of the scheme do not bear the risk arising from the management of the fund and the contributions paid by the employer are a means whereby the employer complies with its legal obligations, is not a “special investment fund” which may be exempted from VAT (point 29).

The above decision was rendered on a question concerning VAT. InFrance, it may however have repercussions in other fields of taxation.

Following the Santander decision of May 10, 2012, French tax law was modified with the result that dividends declared by French companies since August 17, 2012 to foreign collective investment schemes in qualifying foreign jurisdictions are exempt from withholding tax, pursuant to article 6 I-A and II of the law 2012 n° 958 of August 16, 2012.

To qualify for such exemption, the foreign investment schemes must be in the EU or in a jurisdiction which has entered into a treaty withFranceincluding administrative assistance and anti-tax avoidance provisions.

The foreign collective investment scheme must also:

-raise funds from a certain number of investors with a view to investing them, in the interests of such investors, in compliance with a defined investment policy;

-have characteristics similar to those of the following French collective investment schemes: OPCVM (i.e. UCITS) governed by articles 1, 5, or 6 of  I  of  article L.214-1 of the Monetary and Financial Code, French real estate collective investment schemes (OPCI) and close ended investment companies (SICAF).

The law of August 17, 2012 does not give details of the meaning of « similar characteristics » and we will have to wait for administrative commentary to know the real scope of this new law which removes the withholding tax which was applicable to dividends distributed to foreign investment funds.

In view of the Wheels decision we can fear that the French tax authority will take the position that dividends paid to foreign pension funds, held by trustees and not by the beneficiaries of the pensions, are subject to a withholding tax in France, inasmuch as such funds are not comparable with investment funds governed by articles 1, 5, or 6 of  I  of  article L.214-1 of the Monetary and Financial Code.

One can nonetheless consider that such a restrictive interpretation would be contrary to the principle of European law upholding the free movement of capital.

Charles Campbell

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