On April 19, 2016, the Spanish General Directorate of Taxes (GDT) published the binding ruling with reference number V1722-16, in which it is analysed the VAT treatment applicable to investment advisory services on investment funds and to the reception, transmission and execution of orders services related to collective investment institutions (CII).
Although the answer to the query has gone largely unnoticed, the criterion that the GDT issues has a relevant impact for those financial institutions that provide these types of services due to the Directorate’s novel interpretation. Therefore, it is interesting to summarize the ruling’s main conclusions.
The facts described in the ruling refer to a financial entity that provides both types of services to its clients, with the particularity that (i) each service is regulated in separate contracts and, additionally, (ii) the decision of executing or not the orders fell exclusively on the customer.
The resolution raise three questions:
- Whether both services could be considered independently for VAT purposes, although they are regulated in separate contracts.
- Whether the provisions of services, in particular, the service of reception, transmission and execution of orders, could be considered VAT exempt.
- The taxable base of the service(s).
We proceed next to summarize the conclusions of the GDT on each of these issues.
Advisory services and reception, transmission, and execution of orders services as ancillary
To answer this first question the GDT refers to the judgment of the Court of Justice of the European Union (CJEU) dated 19 July 2012, Case C-44/11, Deutsche Bank AG, which analyse the financial nature and the VAT treatment of discretionary portfolio management services.
Although the ruling acknowledges that, although in the case at hand, there was no discretionary portfolio management service, the GDT refers to the abovementioned judgment of the CJEU to apply the same criterion in order to conclude that investment advisory services in investment funds and the services of receipt, transmission and execution of orders relating to collective investment institutions constitute a single provision of services for VAT purposes, even if in the case giving rise to the ruling (i) both services were regulated in separate contracts and (ii) the decision to execute orders fells exclusively in the client.
Both circumstances are clearly differentiating element with respect to the discretionary portfolio management contract, in which it is the manager himself who takes the management and investment decisions and executes the orders by virtue of the management mandate granted by the investor.
To reach this conclusion t(hat both services constitute a single provision of services for VAT purposes), the GDT based its reasoning on the following arguments:
- The management contract referred to in the ruling seems to be intended for those seeking a single comprehensive service of both transactions.
- Although they could be offered separately, the GDT understands that both services are not useful separately because they are so closely related each other that both can be seen to constitute the same service when, as in the case at hand, they are rendered by the same entrepreneur or professional.
- It is a perfectly logical and a widespread practice that an investor who lacks the necessary resources to perform the service her/himself will contract both services, the decision, and its execution to a third party with a proven experience with these types of investments.
- The mere fact that the standard contract object of this ruling specifies a separate percentage of billing for both services does not change its qualification as a single service.
Can this single provision service be considered exempt for VAT purposes?
Once that both services have been considered as a single provision of service, in order to confirm if the service is VAT exempt or no, the GDT refers again to the aforementioned ECJ judgment even though, as we have already noted, the service offered by the financial entity does not meet the requirements to be considered as governed by a discretionary portfolio management contract.
Based on the previously mentioned judgment, whose application to the case at hand is questionable, the GDT holds that the services provided to clients, consisting of advice on investment in collective investment institutions, together with the execution of orders, are not VAT exempt, so VAT must be charged.
The impact of this decision implies that the service consisting of the reception, transmission, and execution of orders -a service which, generally, is exempt from VAT- becomes subject to and not exempt from VAT, as it is considered an ancillary service to the advisory one.
Taxable base of the single provision of services
Finally, the ruling analyses also how the taxable base of the single service should be determined, considering the fact that the consulting financial entity intended to pay back the distribution commission of each investment fund to the final customer. In particular, it is specifically asked whether the taxable base of the service could be reduced by the amount of the retrocession commissions paid by the investment funds in which it was invested.
The GDT concludes that the taxable base of the advisory service is the consideration agreed between the parties, and may be reduced in the retrocession commission if the discount is granted prior or simultaneously to the time of the transaction.
If, on the contrary, the entity decides to grant the discount to its client in the amount of the retrocession received from the investment fund after the accrual of the service rendered, the taxable base must be modified, a change that, in certain cases, would involve the issuance of an amended invoice.
Article originally published on February 22, 2017 in the Spanish language on the website Funds People.