It is certain that management of investment funds is exempt from VAT. However, there has been some doubt as to the correct VAT treatment of parties that supply services directed at private equity- and venture capital funds. In order to tackle this uncertainty, The Norwegian Tax Administration has now issued new guidelines on how the exemption shall be interpreted. The changes stipulated will take effect as of 1st January 2017.
The exemption for management of investment funds
Pursuant to the Norwegian VAT regulations, all sales of services are subject to VAT. One exemption from this main rule concerns “the management of investment companies”. Alternative investment funds, as governed by the Norwegian Law on Management of Alternative Investment funds (AIF regulation), such as private equity and venture capital funds, will usually be considered encompassed by the term “investment company”.
Concerning the scope of the exemption, it is however unclear what types of services that will be covered. The Norwegian Tax Administration has previously portrayed very vague and discretionary criteria for what might qualify, providing little guidance. All the same, investment advisory services, at least in an isolated perspective, has been considered as a service liable for VAT. Despite of this, several suppliers has issued one final invoice for a complete service supply either with or without VAT, based on the so-called principal service doctrine..
More enterprises will be considered to have «shared activities»
The message apparent to come across in the new guidelines seems to be that more and more suppliers in the (investment) funds business sector will have so-called shared or divided activities. In other words, their activities are comprised of services both subject to VAT and services exempted from VAT.
«Shared activities» is a problem area in relation to VAT. Enterprises operating with “shared activities” must ensure that no deductions are made on purchases for the exempted part of the activities, as well as to ensure a proportionate deduction of VAT for purchases to be used in both the registered enterprise and for other (exempted) purposes.
Furthermore, the tax authorities claim that many parties that supply services to investment companies or funds are, in fact, delivering both services subject to and exempted from VAT. For that reason, in the authorities’ opinion, the parties are bound to exercise a more attentive separation of the services subject to VAT, and the services that are exempted. The fact that the service supplier receives one total honorarium for the services rendered will not alter such a responsibility to distinguish between exempted and VAT liable services.
Concerning shared services, The Norwegian Tax Administration emphasize that the service providers must document how they implement such a separation. In the authorities view, this can be solved by registering time spent on different tasks, i.e. hour registration.
However, the authorities do not set out any unconditional duty to exercise hour registration. Duty or not, it should be kept in mind that hour registration is in fact the form of registration commented upon. In addition, the tax authorities makes no mistake in highlighting their various statutory possibilities to ensure compliance with the VAT regulations at any point in the future. In that relation, it seems noteworthy that the service suppliers are required to know about the new guidelines as of 1st January 2017.
Nonetheless, any self-critical reflections concerning a recommendation of hour registration for VAT purposes for an entire business sector is seemingly redundant, as the authorities has made no comment upon this aspect in the letter.
A broadened management concept
According to the AIF-regulation art. 1-2, litra c, “management” is defined as “portfolio management and risk control for alternative investment funds”. Pursuant to the regulation and preparatory works, these two elements serve as the most important tasks for the manager of such funds. Furthermore, it will usually be one appointed party/person, within the fund structure, that is responsible for the management of the fund. To qualify, the party/person is normally required to have a license from the national financial supervisory authority.
Regardless of this, the tax authorities seem to argue that several parties within one fund structure can provide management services. Accordingly, services provided from another party/person than the appointed responsible manager pursuant to the AIF-regulation, can qualify as providing management services exempted from VAT.
As such, the tax authorities seems to gather that «management» in relation to VAT treatment is something completely different that «management» by the AIF-regulation. Such an interpretation harmonizes poorly with previous practice. Through previous years, The Norwegian Tax Administration has assumed that the VAT exemption for financial services must be viewed in conjunction with other regulatory legislation for the financial sector. The tax authorities’ wide interpretation of “management” is thus very unfortunate as it in turn creates confusion as to whom, from a legal perspective, has the management responsibility for a fund.
The guidelines does not provide the desired clarification
The aim of the letter from the tax authorities has been to provide clarification, and to simplify compliance with the VAT regulations. That this is a praiseworthy aim, welcomed by the industry, is certain.
Unfortunately, the guidelines does not provide the clarification desired. Instead, the letter quotes some very vague and discretionary guidelines that were issued in a statement back in 2013. These criteria prove particularly problematic to apply. Here are some examples;
- Criteria for VAT exemption: «advisory is related to real asset management where significant parts of the follow-up work is undertaken by the manager/adviser», and «the management company or a subcontractor must in this instance undertake work both prior to and after sales and investment decisions”.
- Criteria for VAT exemption: «an important question in assessing an exemption is whether a service rendered can be considered as specific and essential for the management of the investment company”.
- Criteria for VAT exemption: “investment advisory services/investment counselling without a continuous and comprehensive character, without exercising work both prior to and after a/any investment- and sales decisions and individual counselling”.
Needless to say, the criteria are not easily applied in practice. As such, it is of little probability that they will contribute to better compliance with the regulations.
In our experience, both the businesses and the case handlers at The Norwegian Tax Administration have encountered difficulties in applying the criteria. The tax officers have previously evaluated comparatively similar cases widely differently. It seems unlikely that the new guidelines will bring any change in this respect.
That which previously has proved beneficial for the parties in the business has been to request a binding preliminary statement from The Norwegian Tax Administration. Such a statement can contribute to clarification, and eliminate the risk that the tax authorities, in a later control or audit, would reach an unexpected conclusion based on their own, diffuse guidelines.
 The principal service doctrine entails that the question of VAT liability is governed by what constitutes the principal delivery of the total supply. Provided that the elements of which are subject to VAT treatment constitute the principal delivery in the supply, then the entire supply will be deemed subject to VAT treatment, and vice versa.
Jeg heter Bjørnar Elverhøy Michaelsen og jobber som advokat i Advokatfirmaet PwC. Jeg jobber til daglig med å bistå næringsdrivende med rådgivning om merverdiavgift. Dette er et område med et komplisert regelverk, stadige lovendringer og omfattende praksis. Det er fort gjort å gjøre feil som fører til betydelige kostnader.
Jeg har lang og bred erfaring innen merverdiavgift, og kan bidra med profesjonell bistand knyttet til merverdiavgiftsmessige utfordringer. Målet mitt er å gi råd som bidrar til å spare unødige kostnader, og til å skape verdier hos virksomhetene. De siste årene har jeg opparbeidet meg betydelig erfaring med momsutfordringer innen næringseiendom og finansiell sektor.
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Bjørnar is an experienced VAT specialist and he gives advice on national VAT issues.
Bjørnar has special expertise in tax issues related to real property, including rental operations, property development, construction, purchase and sale. Bjørnar assists with questions related to mapping of the business, review rental conditions, review of rental contracts, compliance with documentation requirements, deduction of input VAT, preparation of cost allocation rules, formal requirements for the issuance of invoices, accrual of VAT etc. Bjørnar can also help with information and advice on adjustment rules that apply to property.
Bjørnar has extended experience within the FS sector dealing with VAT aspects especially of insurance companies, banks and leasing companies. Items like pro-rata calculation, optimization of tax exemptions especially within outsourcing structures are included.