What is CEF? Very few people have a clear understanding of what is behind this abbreviation.
CEF is closed-end fund. “Closed-end” in this case means that the fund is formed only once. In other words, investors have decided to pool their money to buy securities or real estate, raised the necessary amount of money, and the fund has already been formed, i.e. "closed".
There is also a combined closed-end fund. The assets of such funds may include any assets other than cash. Yet we are not going to focus on structure and features of combined closed-end funds. Instead we will analyse the VAT regime for transactions involving CEF assets.
Let's take a look at the first option, operations involving the transfer of assets to CEF in payment for investment units.
In economic and organisational terms, the transfer of property in payment for investment units of CEF is very similar to the procedure for transferring property in payment for a share in the authorised capital of a public company. In virtue of the provisions of Article 39.2 of the Russian Tax Code (RTC), an operation involving the transfer of property in payment for investment units of a CEF, along with other operations of an investment nature, is not recognised as a disposal.
Following this logic, the provisions of Article 170 of RTC oblige both the person making the transaction, aimed at the contribution of property in payment of the share in the authorized capital of the company (item 3.1 of Article 170 of the RTC), and the person making the transaction not recognized as disposal (item 3.2 of Article 170 of the RTC), to reinstate the amount of VAT which had been deducted after the acquisition of such property.
Thus, since the transaction of contributing property to CEF is not a disposal, VAT previously taken for credit or refund is to be reinstated by the investment unit holder and paid to the budget with its further expensing. Under the provisions of Article 170.3.2 of the RTC, VAT is recovered in an amount proportionate to the residual value of the contributed property.
It should be noted that in accordance with paragraph 3 of Article 171.3 of the Tax Code, if the contributed item of fixed assets is fully depreciated or has been on the books for more than 15 years, VAT cannot be reinstated.
Now we will review the second variant, namely the specifics of transactions related to the acquisition (purchase) or disposal (sale) of assets of CEF, including real estate.
When the CEF property is used for any remunerated transactions that are not related to the issue or redemption of investment units, VAT is charged, paid and reinstated by the CEF management company and its counterparties in the standard mode (except for transactions with the respective property are not subject to VAT (land, securities, etc.)). Therefore, VAT paid at the expense of the CEF property on the acquisition of property for CEF is subject to offset or reimbursement according to the provisions of Article 176 of the RTC. In the event of disposal of an object from the CEF property, VAT is paid to the budget in accordance with the provisions of Article 174 of the RTC.
VAT ON ALLOCATION OF PROPERTY FOR HOLDERS OF REDEEMABLE CEF INVESTMENT UNITS
The possibility of allotment of property when redeeming investment units became available to Combined CEFs only in March 2021. There have been no real cases of such allotment, or no reliable information about them from either market participants or regulators. In this regard, there are no established public attitudes regarding VAT on transactions related to the allotment of property from the CEF. Until further comments on various aspects of the taxation of these transactions are issued, we can base on the economic sense of the transactions.
Based on the provisions of Article 39.3.5 of the RTC, the transfer of property within the limits of the initial contribution to a participant in a business entity or partnership is not recognised as the disposal of goods, works or services. It would thus be logical to assume that the value of the property beyond the initial payment would be treated by the tax authorities as a disposal. Consequently, this value (excess) should be taxed. As no income tax is imposed or paid on CEF property transactions, the CEF management company will have to charge and pay value-added tax at the expense of the CEF property.
This means that in order to carry out a transaction involving the allotment of the CEF's assets to the holder of redeemable investment units, CEF must have sufficient funds in its assets to meet its obligations to the budget.