Deutsche Bank case
The 2012 CJEU ruling held that discretionary portfolio management services provided by Deutsche Bank should be treated as a single service which is subject to VAT. The service provided by Deutsche Bank consisted of analysing and monitoring assets of client investors in addition to the purchasing and selling securities. The annual fee charged to clients comprised of a separate identified fee for (i) asset management and (ii) buying and selling of securities. The fee also covered account and portfolio administration and front-end fees for the acquisition of shares. In this case, the CJEU held that the services being provided were so closely linked that they formed a single economic supply which would be artificial to split. It was therefore held that these services did not fall within the exemption under Article 135(1)(f) of the EU VAT Directive.
It should be noted that the Deutsche Bank case related to services generally provided to single investors as opposed to services provided to ‘special investment funds’, which may be exempt from VAT.
Prior to the ruling in the Deutsche Bank case, Revenue had taken the view that portfolio management services were comprised of several separate elements. Where these separately identifiable activities were engaged in by the portfolio manager, Revenue practice was that each activity could be treated separately for VAT purposes provided there was a legal management services agreement in place. Revenue have now stated that this position can no longer apply where a fee is charged on a periodic basis for a single supply of a service consisting of (i) analysing and monitoring the assets of client investors and (ii) of purchasing and selling securities. The CJEU judgment clearly provides that the entire fee should be subject to VAT.
However, Revenue have confirmed that where portfolio fees are charged strictly for the purchase or sale of shares or securities on a transaction by transaction basis VAT exemption continues to apply where:
- the contractual arrangements reflect that fees are being charged on a transaction by transaction basis, and
- the arrangements are correctly reflected on the invoices.
Revenue does not propose retrospective application of this new position or to review past VAT periods where portfolio managers disaggregated their services under the previous Revenue practice.
Impact of new Revenue view
It is anticipated that the new Revenue position will have limited impact for portfolio managers. Many managers revised, where relevant, their contractual arrangements with clients following the 2012 Deutsche Bank ruling. However some managers did commence to apply VAT to their full fees for portfolio services. Where managers are providing distinct execution only services (in addition to discretionary or advisory type services or otherwise) charged on a transaction by transaction basis they should consider the most appropriate contractual arrangements to put in place with clients.
To learn more about this matter and financial services VAT please contact Patrick McClafferty, Partner at Nexus Taxation – firstname.lastname@example.org