Investment trust companies, including a unit of JPMorgan Chase & Co., may be able to benefit from the same tax exemptions as mutual funds, an adviser to Europe's highest court said in a case that could lead to millions of pounds of refund claims.
JPMorgan Fleming Claverhouse Investment Trust Plc sued Britain's HM Revenue & Customs department over the value-added tax that investment trusts are charged on their management fees. The UK is misapplying a European Union tax exemption by only applying it to a selected number of funds, the company claimed. EU rules exempt management fees of „special investment trusts” from VAT, which the UK interprets as applying to open-end funds such as mutual funds.
The current rules cost the investment company industry about £40 million ($78 million) a year, according to the Association of Investment Companies, a London-based trade group that backs JPMorgan in the case. EU countries must respect „the principle of fiscal neutrality, which requires all similar and therefore competing special investment funds to be treated equally as regards the levying of VAT,” Juliane Kokott, an advocate general at the European Court of Justice in Luxembourg, said today. The court, which follows its advisers' opinions in a majority of cases, is expected to publish its ruling later this year. Its decisions must be followed by the 27-nation EU bloc.
Investment trusts are closed-end funds, which unlike open-end funds have a limited number of shares that trade on an exchange. Special investment funds are „capable of including closed-ended investment funds,” Kokott said in her opinion. Britain currently only exempts open-end funds, such as mutual funds, putting about 250 investment companies in the UK at a disadvantage, Ian Sayers, deputy director-general of the Association of Investment Companies, said in a telephone interview earlier this week.
Mutual funds are known as unit trusts in Britain. „It is effectively acting as a distortion of competition,” Sayers said. With companies possibly able to claim back as far 1991, a ruling in their favor could lead to claims „in the hundreds of millions of pounds,” he said. Open-end funds, which vary in size as investors buy and sell from the unlimited number of shares, don't pay the 17.5% in VAT that closed-end trusts pay on top of the fees charged by their management companies. JPMorgan Fleming Claverhouse Investment Trust is managed by JPMorgan Asset Management, which is owned by the US's third-biggest bank JPMorgan Chase & Co..
„The issue is whether or not the UK is right to restrict the definition of `special investment funds' or whether it should extend the exemption to other forms of investment trusts,” said Marc Welby, head of the value-added tax practice at London-based Chiltern Plc. Management companies would no longer charge the VAT, which would decrease costs and improve the performance of closed-end trusts, said Welby. The British VAT and Duties Tribunal, which dealt with the original appeal, referred the case to the Luxembourg-based court in 2005 seeking more guidance on how to interpret EU rules, especially the term „special investment funds.” (Bloomberg)