Legal Alert – VAT Treatment of Real Estate Funds
Finnish Supreme Administrative Court has in its recent judgment discussed certain VAT aspects relating to real estate funds. In the case at hand, a Finnish private equity fund operated in the form of a limited partnership and invested only in the shares of real estate companies. The fund was liable for VAT on renting of commercial real estate.
In the structure in question the fund purchased all the management services including e.g. administration and development of the real estates, managing the contracts relating to the real estates, reporting, bookkeeping and other administrative duties from its general partner. The general partner did not employ any staff, thus it purchased certain services further from two other companies which were subject to Finnish VAT.
In the case at hand, the general partner applied for VAT liability based on the management services offered to the fund. Conventionally, in Finnish tax practice the management services of a general partner offered to a private equity fund have been considered to belong to such financial services which are exempt from VAT. On the other hand, based on Finnish VAT Act, trading of a security which entitles to control a defined apartment, real estate or part of those shall not qualify as VAT-exempt financial service.
In the case the court increased legal certainty concerning the abovementioned question by declaring that the management of a real estate fund investing only in the shares of real estate companies shall not be deemed to be VAT exempt financial service. The court also stated that the demand for neutral treatment in value added taxation did not prevent treating the activities of the general partner subject to VAT.
The resolution considerably decreases the uncertainty regarding VAT treatment of real estate fund structures. In practice, it seems possible that a general partner of a real estate fund is at least in certain circumstances able to become subject to VAT and thus VAT of the services it purchases from third parties can sometimes be fully deductible. This naturally decreases the possible VAT leakage of the general partner or the fund in general to a considerable extent. Naturally, the applicability of the principle cannot be extracted to such private equity funds which are not subject to VAT, nor it directly decreases the prevailing uncertainty regarding housing funds.