Ireland: Irish Revenue Commissioners issue guidance on the VAT treatment of portfolio management services in wake of Deutsche Bank
On September 4 2015, the Irish Revenue Commissioners (Revenue) issued updated guidance to confirm their position on the VAT treatment of discretionary portfolio management services after the European Court of Justice (ECJ) decision in Finamzamt Frankfurt am Main v Höchst Deutsche Bank (C-44/11). This guidance does not affect the VAT treatment of portfolio management services provided to funds. These services should continue to be exempt from Irish VAT as management services provided to specified special investment funds.
However, discretionary portfolio management services provided to other entities or individuals may no longer be separated from their composite parts as advisory services which are subject to VAT and execution services, which are exempt from VAT. Both services should now be treated as a single economic supply which is subject to VAT whereever the fact pattern in the Deutsche Bank case is replicated.
VAT treatment pre-Deutsche Bank
Before the Deutsche Bank decision, Revenue had treated portfolio management services as being comprised of several separate elements. Accordingly, where separately identifiable services were provided by a portfolio manager, each service could be treated separately for VAT purposes provided:
there was a legal management services agreement in place;
the separate elements were clearly identifiable in the services agreement;
the basis for apportionment of the fee was realistic; and
the activities in question were actually undertaken.
This effectively allowed portfolio managers to treat a portion of their total fee as VAT exempt (the portion which related to the buying and selling of securities) on the basis of the exemption for transactions in shares and other securities provided in article 135(f) of Directive 2006/112 (the VAT Directive).
The Deutsche Bank decision
The ECJ, in Deutsche Bank, was asked to consider:
whether the bundle of advisory and execution services provided to client investors constituted a single supply; and
if so, whether that portfolio management service should be VAT-exempt as a dealing in securities.
The ECJ held that Deutsche Bank's execution and advisory elements were each essential elements in carrying out the portfolio management service as a whole. Taken together, they were held to be so closely linked that, objectively, they formed a single, inseparable economic supply which it would be artificial to split.
The ECJ then considered whether such single economic supply should be exempt or not. The ECJ noted that the exemption for dealings in shares covers transactions to "create, alter or extinguish" parties' rights and obligations in respect of securities. The Court considered this as only part of the overall service, and held that given the requirement to strictly interpret the scope of EU VAT exemptions, Deutsche Bank's portfolio management services must be taxable.
Change in position
Revenue has now confirmed that following the decision in Deutsche Bank, it will no longer accept the splitting of portfolio management service fees between exempt and non-exempt elements for VAT purposes. Rather, the supply of portfolio management services to client investors will be treated as a single supply consisting of (i) analysing and monitoring the assets of client invested; and (ii) purchasing and selling securities. That supply will be subject to VAT at the standard rate.
However, Revenue has stated that where fees are charged strictly for the purchase or sale of shares or securities, the exemption will continue 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 has confirmed that it will not seek to apply the Deutsche Bank decision retroactively.
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