The European Court of Justice (ECJ) has ruled that tax exemptions fuelling the rapid growth of Dublin's fund management and securitisation industries are valid.
The judgment - in a case between British financial services firm Abbey National and the UK government - is the second time this week the Republic's tax code has been endorsed by Europe's top court.
The case centred on member states' power to define what activities comprise "management" of special investment funds and on whether the services of depositories/trustees and third-party administrative managers should be exempt from VAT.
Ireland, Luxembourg and France have regarded fund administration services as VAT exempt but other EU jurisdictions, including the UK, have not.
The court ruled that administrative management of special investment funds by third parties should be exempt from VAT.
However, the court found that supervisory services supplied by depositories (trustee/custodian) did not form part of the fund management function and did not qualify for exemption. This went against the earlier opinion of the court's advocate-general.
Breen Cassidy, indirect tax services partner at Ernst & Young, said that decision may lead to the Revenue revisiting its view on the exemption applying to the supervisory activities of custodians. The exemption on global custody services may also come under scrutiny. "Such a move would lead to increased costs for funds, which would impact on the return for investors," he said.
Still, Irish tax consultants last night said the judgment was largely positive. "The decision is very welcome news for the Irish financial services industry and a clear vindication of the position adopted and legislated for in Ireland with the support of the Revenue and the Department of Finance," said Greg Lockhart, head of VAT consultancy at Matheson Ormsby Prentice.
Several recent ECJ decisions on VAT have gone against the Irish position and an adverse ruling would have had significant implications for the Dublin funds industry.
"The ECJ's decision is particularly relevant to Ireland as it is a market leader in the provision of outsourced fund management functions to Irish and non-Irish domiciled funds," said KPMG's VAT director Keith Loughman. "Had Irish service providers been obliged to charge VAT on their services, this could have had a very significant impact on the competitiveness of the Irish industry."
However, he said that significant inconsistences still exist in taxation of funds across Europe.
The decision follows a ruling by the court's advocate-general earlier this week that the UK's efforts to tax profits on Cadbury Schweppes' Irish-based subsidiaries at the higher British corporation tax rate were wrong. That ruling has yet to be confirmed by the full court.
