VAT on Management Fees: A 21% Line Item Most Investors Never Notice
Whether your fund or SPV pays VAT on management fees can change net IRR by 50–100 bps. How the rules work and what to look for.
Why VAT on fees matters
Management fees of 1.5–2% per year, compounded over a fund's life, add up to a substantial drag. Add VAT at 19–25% on top of those fees and the drag becomes meaningfully worse — typically 30–50 bps per year on net IRR.
Many investors model gross fees and forget the VAT line. On a 10-year fund, that can be 5%+ of net return left out of the projection.
The fund-management VAT exemption
Most major jurisdictions exempt the management of regulated investment funds from VAT. The exemption is narrow — it applies to defined regulated vehicles, and only to services that meet the technical definition of 'fund management'. Advisory fees outside that scope, performance fees, and one-off transaction fees may all fall outside the exemption.
Some fund structures (notably certain Luxembourg and UK vehicles) achieve full exemption. Others (notably some closed-end and unregulated structures) do not. The difference can be material.
Questions to ask a sponsor
Is the management fee inside or outside the VAT exemption? Are performance fees treated the same? What about transaction and advisory fees? Has the SPV's input VAT recovery been factored in? A sponsor who can answer these crisply is running a serious shop.
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