The European Court of Justice rules on VAT taxation of portfolio management service in the recent Deutsche Bank Case (C-44/11), directly impacting investment managers pricing strategies and margins
By way of the Deutsche Bank Case (C-44/11) the European Court of Justice (ECJ) was recently deliberating a preliminary ruling regarding the treatment of portfolio management services rendered to private investors. The ECJ has just released their opinion, rejecting Deutsche Bank’s partial VAT exempt treatment position, and ruling that portfolio management services are in fact subject to VAT.
Deutsche Bank was instructed by private investors to manage securities, at its own discretion and without obtaining prior instruction from them, in accordance with the investment strategy variants chosen by them and to take all measures which seemed appropriate for those purposes. As it is current practice in the sector, the investors paid an annual fee based on the value of the assets under management. That fee mainly included a share for asset management and a share for buying and selling securities.
Deutsche Bank reported portfolio management services as VAT exempt in its VAT returns. This position was based on the VAT exemption applicable to transactions in securities or the negotiation of such transactions.
In its reasoning, the ECJ held that portfolio management services basically consist of a combination of a service of analysing and monitoring the assets of investors and purchase and sale of securities. While it can be defended that those two elements of the portfolio management service may be provided separately. The Court held that the average client investor seeks precisely a combination of those two elements and as they are so closely linked, they form, objectively, a single economic service.
As it is established jurisprudence that the VAT exemptions must be interpreted strictly, the ECJ held that neither the VAT exemption applicable to transactions in securities, or the negotiation of such transactions, nor the VAT exemption applicable to the management of investment funds could cover portfolio management services rendered to private investors. Such service as a whole must therefore be considered subject to VAT.
This ruling has negative impact to managers of private portfolios since up to now part of the service of portfolio management was VAT exempt; going forward it will be reflected in their pricing strategies and the margins of their portfolio management services.
The situation however is not beyond hope since, interestingly, in its conclusions. The Advocate General had mentioned that, in isolation, transactions services should benefit from a VAT exemption. Depending on operational processes and underlying agreements, there might still be opportunities to achieve a VAT exemption on part of the services rendered to private investors. We therefore suggest that portfolio managers review their operational processes and underlying agreements.
Further information, please contact Christophe Plainchamp firstname.lastname@example.org and Nicolas Devillers email@example.com.