Our more detailed comments in relation to the draft compromise texts are set out below.

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1 Mr. Adam Siekierski (Indirect taxes VAT and excise duties) Mr. Krzysztof Nichczyński (Indirect taxation VAT) Permanent Representation of the Republic of Poland to the European Union Avenue de Tervuren, Brussels Transmission via September 2011 Dear Mr Siekierski and Mr Nichczyński EFAMA comments on VAT Compromise Texts dated 1 July 2011 We 1 are pleased to send you our comments on the most recent compromise texts for a VAT Council Directive and Council Regulation (FISC 98 and 99). By way of a general introductory remark, we are of the view that the Directive and Regulation will not be consistent with the aims of the VAT exemption without a clear view on the purpose of the exemption and what it should achieve. We feel that agreement between Member States on the fundamental principles of Abbey National (C-169/04) is needed and suggest that it would be a good idea for the pre-amble to the Directive to be amended to include commentary on the Abbey National principles. Our more detailed comments in relation to the draft compromise texts are set out below. 1. Definition of management of investment funds and pension funds - Directive Introduction 1.1 The definition of management of investment funds and pension funds in Article 135(1)(gc) of the most recent compromise text of the Directive refers to: services of collective portfolio management necessary for achieving the investment objectives of the investment fund and pension fund concerned. 1 EFAMA is the representative association for the European investment management industry. It represents through its 26 member associations and 56 corporate members approximately EUR 13.8 trillion in assets under management, of which EUR 8.1 trillion was managed by approximately 54,000 funds at end June Just under 36,000 of these funds were UCITS (Undertakings for Collective Investments in Transferable Securities) funds. rue Montoyer 47, B-1000 Bruxelles Fax info@efama.org

2 2 1.2 Our members have the following comments on the proposed definition. Inclusion of collective in the term collective portfolio management 1.3 We understand that the word collective was included due to Member States concerns about the VAT treatment of private (non-collective) portfolio management and to follow the wording of the UCITS Directive (i.e. the reference in Annex II to Directive 85/611/EEC to collective portfolio management ). 1.4 In our view, however, neither of these concerns should make it necessary to include the word collective in the definition of management of investment funds and pension funds on the basis that: a. the definition of both investment funds and pension funds already require that such funds be undertakings for collective investment (see paragraph 3 below), which should be sufficient to deal with Member States concerns about the VAT treatment of private (non-collective) portfolio management; and b. there is no obvious requirement to conform with the UCITS Directive on this point, especially given the fact that the VAT compromise texts often diverge from concepts in the UCITS Directive (for instance, the definition of fund management for VAT purposes does not include the concept of marketing which is explicitly mentioned in Annex II of the UCITS Directive). 1.5 Our members are furthermore concerned that the term collective in the definition of management of investment funds and pension funds could be interpreted restrictively by some Member States and be harmful, in particular, to master/feeder structures or for services rendered to a dedicated fund or sub-fund. Use of the words necessary for 1.6 In our view, the words aimed at (as included in previous compromise texts) would be preferable to necessary for on the basis that national authorities may have different interpretations of which type of services are necessary for the investment objective of the fund. 1.7 The terminology could, however, be improved still further, if, instead of necessary for or aimed at, the following wording were used: services of collective portfolio management necessary for linked to the running of and/or achieving the investment objectives of the investment fund and pension fund concerned.

3 3 Management of pension funds 1.8 We note the comment in the previous Presidency progress report that the management of pension funds could be considered similar to the management of investment funds and agree that the nature of the management services (and, where applicable, any tradespecific investment advice) provided to such funds and the rationale behind exemption for such services are similar. 1.9 We would, however, note that the question of whether pension funds are similar to and thus in competition with investment funds is a matter which has been referred to the European Court of Justice ( ECJ ) in the UK case of Wheels Common Investment Fund Trustees Limited and others v The Commissioners of HM Revenue and Customs. 2. Definition of management of investment funds and pension funds - Regulation Introduction 2.1 Article 11(3) of the most recent compromise text of the Regulation specifies that the definition of management of investment funds and pension funds in Article 135(1)(gc) of the Directive shall cover at least a bundle two of a specified list of services, including strategic asset management, legal and fund management accounting services, the maintenance of unit-holder registers, unit issues and redemptions, and valuation and pricing. Article 11(4) of the most recent compromise text of the Regulation provides that certain other activities, including safe custody, fund advertising and investment advice, will not fall within the scope of the above definition. 2.2 Our members have the following comments on the proposed definition. At least two of or a bundle of 2.3 The phrase at least a bundle of has been replaced with at least two of in Article 11(3) of the most recent compromise draft of the Regulation. We are not, however, in favour of the use of either phrase on the grounds that, at least certain activities (namely, strategic asset management, the maintenance of unit-holder registers and valuation and pricing) should be VAT exempt irrespective of whether they are outsourced on their own or with other activities, on the basis that they are, in their own right, specific and essential functions of fund management. Please see our comments at paragraph 6 below.

4 4 Investment advice 2.4 Please see our comments at paragraph 4 below in relation to the exclusion of investment advice by Article 11.4(f) from the scope of the exemption for the management of investment funds. Legal and fund management accounting services 2.5 The definition of fund management includes legal and fund management accounting services. We question what legal services would be provided as part of collective portfolio management and, in any case, suggest that the wording should be changed to legal or fund management accounting services. Provision of excluded services as part of a bundle of exempt services 2.6 It should be clarified that excluded services (such as fund advertising and investment advice) may be exempt from VAT under another heading (for example, intermediation), irrespective of whether included as a bundle with exempt services which fall within the exemption for the management of investment funds or not, as we are concerned that some Member States may try to argue that the exclusion under Article 11(4) is absolute. 2.7 We have similar concerns in relation to the drafting of the exclusions in Article Definition of investment funds Introduction 3.1 The definition of investment funds in Article 135(1)(gc) of the most recent compromise text of the Directive refers to: undertakings for collective investments the sole object of which is investment in securities, cash, other financial assets or in real estate of capital raised directly or indirectly from investors the public and which are subject to rules designed to protect investors and operate on the principle of risk spreading irrespective of the level of risk taken. 3.2 Our members have the following comments on the proposed definition. Sole versus main object 3.3 Under the current drafting, only investment funds whose sole objective is investment in securities, other financial assets or real estate would be eligible under the exemption. Our members consider that this should be amended to refer to their main objective, as

5 5 otherwise the definition could exclude funds investing a de minimis percentage of their overall capital in other asset classes. 3.4 By way of example, the principle object of a fund may be investment in shares and derivatives. Such fund may be entitled to invest a very small percentage of its assets (for example, 5 per cent. of NAV) in derivative contracts where the underlying asset is a commodity. Such derivative contracts will, in practice, almost inevitably be cash-settled, although physical delivery of the underlying asset may theoretically be possible under the terms and conditions of the contract. 2 Under the current drafting, it is arguable, therefore, that such fund will not constitute an investment fund for the purposes of the exemption. Capital raised from investors 3.5 We welcome the change to the definition from capital raised directly and indirectly from the public to capital raised from investors to the extent that it would give certainty and avoid the risk of differing interpretations as between Member States. Risk spreading 3.6 We support deletion of the words irrespective of the level of risk taken, as this removes a subjective measure of risk. It is, however, considered that the definition could be substantially improved by replacing and operate with or operate, on the grounds that risk spreading is only one of the rules aimed at investor protection. 4. Investment advice Introduction 4.1 Our members have the following comments in relation to the exclusion of investment advice by Article 11.4(f) from the scope of the exemption for the management of investment funds. Exclusion of investment advice 4.2 Our members are not clear regarding the rationale for excluding investment advice from the scope of the exemption for the management of investment funds and would welcome clarification on the policy objective(s) involved. 2 For instance, in the UK market, there is a requirement that commodity derivatives be capable of delivery in order to tie the price of the derivatives to the market (even though it is, in practice, very rare that delivery occurs).

6 6 4.3 As we have explained in more detail in our previous submissions (see the Appendix to this letter), the receipt of investment advice is crucial and intrinsically linked to the management of an investment fund. 4.4 The following additional considerations should be taken into account: a. The term investment advice is not used consistently across jurisdictions and, as such, gives rise to the risk of differing interpretations as between Member States. b. In most European jurisdictions, the term investment advice is used to refer to arrangements under which someone other than the party providing the advice is taking the final decision as to which assets to purchase, sell or hold. In such circumstances, the board of directors of the investment fund (or its management company) will receive recommendations from the investment adviser but retain the authority to accept or decline such recommendations. By contrast, the term investment management is usually used to refer to circumstances where the third party service provider actually makes the final investment decision on a discretionary basis. In some jurisdictions, however, whilst the final decision remains with the investment fund, such decision is, in practice, only a formal ratification of concrete (i.e. trade-specific) advice. For instance, the management company may, in practice, accept recommendations from the investment adviser within minutes of their submission, even though it has the authority either to accept or decline such recommendations. There is very little difference in practice between investment advice and outsourced investment (portfolio) management in that such investment advice consists of a service the nature of which corresponds to outsourced investment management save to the extent that it stops just short of the investment decision. As such, we are of the view that the service of investment advice constitutes a distinct whole and fulfils in effect the specific and essential functions of exempt fund management services. c. In light of the above, we are of the view that, taking into account the aim of the exemption to allow investors in special investment funds to access professional investment expertise without the obstacle of VAT (as to which see our further comments at paragraph (d) below), investment advice which is trade-specific (i.e. can be linked to actual or prospective trades by the fund) should fall within the exemption. In this respect, we would also like to draw your attention to the case of GfBk Gesellschaft für Börsenkommunikation mbh v Finanzamt Bayreuth (Case C- 275/11) which has been referred to the European Court of Justice and

7 7 specifically poses the question as to whether trade-specific investment advice provided to investment funds is exempt from VAT under the existing legislation. d. The exclusion of investment advisory services from the VAT exemption would have unwelcome consequences in that it would result in significant additional costs for investment funds which rely on third party investment advisors, on the grounds that the fees paid to investment advisers represent a significant proportion of their costs. This would, in turn, favour large management companies established in large centres of commerce, such as London and Frankfurt, where it would be easier to employ in-house teams with the necessary expertise or where management companies may have investment advisors within the same VAT group. Such a result would: i. go against the fundamental principle of freedom of services in that cross-border outsourcing of such services would, in spite of the fact that they are crucial and intrinsically linked to the management of an investment fund, always be less efficient than services provided within a strictly national framework; and ii. would also result in unequal treatment of large and small enterprises. 4.5 In light of the points set out at paragraphs 4.3 and 4.4 above, we would, therefore, urge that the Regulation be revised as follows: a. Either, and preferably, the reference to investment advice should be deleted from Article 11.4 of the Regulation; or alternatively, b. The words investment advice in Article 11.4(f) should be replaced with the following wording: advice in relation to investments other than trade-specific advice which leads directly or indirectly to an investment decision taken by the investment fund or pension fund. Provision of investment advice as part of a bundle of exempt services 4.6 The position where investment advice is included as a bundle with exempt services which fall within the exemption for the management of investment funds should also be clarified (see paragraph 2.7 above).

8 8 5. Intermediation in financial transactions Introduction 5.1 The term intermediation in...financial transactions is defined in Article 135(1)(gc) of the most recent compromise text of the Directive as: a distinct act of mediation rendered by a third party who brings the parties together and does what is necessary in order for the parties to enter into, maintain, renew or alter a contract in...financial transactions as referred to in points (a) to (gb). Further details are set out in Article 12 of the Regulations. 5.2 Our members have the following comments on the proposed definition. Brings the parties together and does what is necessary 5.3 In light of the ECJ decision in Volker Ludwig (C-453/05), in which it was held that it is not necessary for an intermediary to have a direct contractual link to the principals in a transaction to qualify for exemption, we consider that it would be preferable for the definition to refer to: a distinct act of mediation rendered by a third party who brings the parties together and does whose purpose is to do what is necessary in order for the parties to enter into, renew or alter a contract in...financial transactions as referred to in points (a) to (gb). Level playing field with insurance products 5.4 In order to enhance clearness, consistency and a level playing field in respect of the VAT treatment applied to the intermediation in both insurance and financial transactions, it would be advisable to explicitly state that the latter includes the unit of an Undertaking for Collective Investment in Transferable Securities. 5.5 Therefore, for the avoidance of doubt, the words Financial transactions include any of the transferable instruments cited in the definition at points (ga) and (gb). could be added at the end of the definition in Article 135(gd) of the Directive. Discretionary management of investment portfolio 5.6 We consider that wording referring to management on a discretionary and individualised basis of investment portfolios should be included in Article 12(1) of the Regulation.

9 9 6. Outsourcing Introduction 6.1 The current wording of the outsourcing exemption in Article 135(1a) of the Directive is broadly in line with the jurisprudence of the ECJ and is, therefore, acceptable in principle to our members. 6.2 We would, however, note that, as shown by both case law and the present discussions between Member States, this wording is subject to a number of different interpretations. Given that the aim of modernising the VAT rules for financial services is to improve legal certainty and to avoid additional costs caused by hidden VAT to ensure neutrality for financial institutions, we believe that it is critical that the new Directive and Regulation clarify under which conditions an outsourced financial service qualifies for exemption. 6.3 By way of a general overarching comment, we would, therefore, note that there is a particular need for the new Directive and Regulation to clarify: a. what is meant by specific and essential, which may require a statement of principle in addition to listing examples; and b. whether and, if so, under which conditions, a service will constitute a distinct whole. Given the importance of these points and the stated desire to obtain consistency across Member States, we believe that clarification should not be left to national legislation and national courts. 6.4 We have set out our further comments on the existing text below. Clarification of the relationship between the outsourcing and fund management exemptions 6.5 We would also draw your attention to the fact that there remains material uncertainty in the current compromise texts as to the relationship between: a. Article 135(1)(gc) of the draft Directive and Article 11 of the draft Regulation, which give details of the exemption for management of investment funds and pension funds ; and b. Article 135(1a) of the draft Directive and Article 13 of the draft Regulation, which give details of the generic outsourcing exemption,

10 Such uncertainty arises as a result of the fact that, under the current draft compromise texts, outsourced fund management services may fall under both rules, which are different in scope; for example: a. Article 13 of the Regulation excludes administrative tasks and legal, accounting and auditing services from the outsourcing exemption in Article 135(1a) of the Directive; but b. Article 11(3) of the Regulation specifically provides that such services are included within the definition of fund management, in line with the ECJ decision in Abbey National (C-169/04). 6.7 We believe, therefore, that the drafting needs to be amended such that: a. Article 11(3) of the Regulation only sets out services which are deemed to be exempt fund management services in their own right, without the need for further consideration of whether these services in addition form a distinct whole (i.e. such services should be exempt irrespective of whether they are outsourced or not, or outsourced on their own or with other activities); b. Article 135(1a) of the Directive covers the supply of any constituent element of exempt fund management services which does not fall within Article 11(3) but nonetheless in itself constitutes a distinct whole and fulfils in effect the specific and essential functions of exempt fund management services; c. a new Article 13(2) is inserted into the Regulation, providing examples of outsourced fund management services which will fall within Article 135(1a); and d. there is a specific statement to the effect that, to the extent they apply, Article 135(1)(gc) of the Directive and Article 11(3) of the Regulation override Article 135(1)(a) of the Directive and Article 13 of the Regulation; 6.8 An alternative approach would be for all outsourced fund management services to be dealt with under Article 135(1a) of the Directive and Article 13 of the Regulation. This would, however, require amendments to the existing drafting to ensure that the new Article 13(2) deems all fund management services which are exempt in their own right, whether or not outsourced alongside other activities (i.e. the Article 11(3) services) to be services constituting a distinct whole and fulfilling in effect the specific and essential functions of exempt fund management services.

11 11 We trust our comments are helpful and we look forward to a positive conclusion of the ongoing review process. We remain at your disposal for any questions you may have. Yours sincerely Peter de Proft Director General Enc. : Appendix [ ]

12 12 Appendix Extract from EFAMA comments to the Belgian Presidency of 25 November 2010 Investment managers make investment decisions based on complex analysis. It is very common in the fund industry that fund managers request external advice when they do not have sufficient resources in-house. No fund manager could pretend to have a universal knowledge and expertise. In this sense, it is absolutely crucial to exempt from VAT investment portfolio advice. Indeed, these services are absolutely necessary for managing a fund. Advice services in the scope of the VAT exemption must of course be investment portfolio ones. The aim is, of course, not to exempt legal or tax advice. For instance, asset managers are usually led to request investment advice from independent firms specialised in a geographical zone or in a niche market (bio-technical companies, green companies or ethical or sharia compliant investments). This advice typically implies the assistance of specialised and costly advisors. These advisors are not involved in the management of the portfolio in the sense that they do not make the formal decisions, but instead provide concrete advice on the basis of consideration of regulatory rules and fund rules necessary in order to enable the manager to adapt the advice in making appropriate investment decisions. For example, without such advice, it would be very difficult to invest in a way that respects green, ethical or sharia requirements.