Flashback on ECJ cases C-44/11 (Deutsche Bank) – No Exemption for transactions relating to the management of securities-based assets (portfolio management))

On July 19, 2012, the ECJ issued its decision in the case C-44/11 (Deutsche Bank) related to the Exemption for transactions relating to the management of securities-based assets (portfolio management). The ECJ decided that transactions relating to management of asset based securities (discretionary portfolio management) including execution of transactions in shares, are subject to VAT.
This judgement has important implications on the portfolio management industry within the EU and will impact both the providers and the recipients of these services.

Article in the EU VAT Directive

Articles 56, lid 1, sub e and 135(1)(f) and (g) of the EU VAT Directive 2006/112/EC.

Articles 56, lid 1, sub e: This was the version of the article applciable till 2010.

Article 135 (Exemption)
1. Member States shall exempt the following transactions:

(f) transactions, including negotiation but not management or safekeeping, in shares, interests in companies or associations, debentures and other securities, but excluding documents establishing title to goods, and the rights or securities referred to in Article 15(2);
(g) the management of special investment funds as defined by Member States;

Facts

Deutsche Bank provided, either itself or through subsidiaries, portfolio management services to investors. In accordance with predefined investment strategies chosen by the investors, Deutsche Bank was instructed to manage securities at its own discretion as well as to take all measures which seemed appropriate for those purposes including acquisition and disposal of the securities in the name and on behalf of the investors. The services consisted of a combination of a service of analysing and monitoring the assets of the client investors on the one hand, and of a service of actually purchasing and selling securities on the other. In exchange for its services, Deutsche Bank charged an annual fee of 1.8% of the value of the managed assets. This consisted of a fee for asset management amounting to 1.2% of the value of the assets under management and a fee for buying and selling securities of 0.6% of the value of the
assets under management.
Deutsche Bank reported its income as VAT exempt in its German VAT returns. The German authorities challenged the exemption and considered that the services were taxable.

Questions

Is the management of securities-based assets (portfolio management), where a taxable person determines for remuneration the purchase and sale of securities and implements that determination by buying and selling the securities, exempt from tax

– only in so far as it consists in the management of investment funds for a number of investors collectively within the meaning of Article 135(g) of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax ¹ or also

– in so far as it consists in individual portfolio management for individual investors within the meaning of Article 135(1)(f) of Directive 2006/112/EC (transactions in securities or the negotiation of such transactions)?

For the purposes of defining principal and ancillary services, what significance is to be attached to the criterion that the ancillary service does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied, in the context of separate invoicing for the ancillary service and the fact that the ancillary service can be provided by third parties?

Does Article 56(1)(e) of Directive 2006/112/EC cover only the services referred to in Article 135(1)(a) to (g) of Directive 2006/112/EC or also the management of securities-based assets (portfolio management), even if that transaction is not subject to the latter provision?

AG Opinion

(1) Portfolio management services of the kind at issue in the main proceedings form a single supply for VAT purposes.

(2) Such services do not fall within the exemption provided for in Article 135(1)(f) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax.

(3) In Article 56(1)(e) of Directive 2006/112, ‘banking, financial and insurance transactions’ are not confined to those listed in Article 135(1)(a) to (g) thereof but include, inter alia, portfolio management services of the kind at issue in the main proceedings.

Decision

1. A securities-based assets management service, such as that at issue in the main proceedings, namely where a taxable person for remuneration and on the basis of his own discretion takes decisions on the purchase and sale of securities and implements those decisions by buying and selling the securities, consists of two elements which are so closely linked that they form, objectively, a single economic supply.

2. Article 135(1)(f) or (g) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that securities-based asset management, such as that at issue in the main proceedings, is not exempt from value added tax under that provision.

3. Article 56(1)(e) of Directive 2006/112 must be interpreted as covering not only the services referred to in Article 135(1)(a) to (g) of Directive 2006/112, but also securities-based assets management services.

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