Death of an intermediary – how recent court decisions on VAT impact the financial sector

The VAT exemption for securities intermediation is of key importance for the financial industry. In two recent rulings, the Swiss Federal Administrative Court reinforces a general trend towards (further) limiting this VAT exemption.

In brief

• The Swiss Federal Administrative Court's recent rulings challenge an established practice in respect to securities intermediati­on for external asset managers and the placement of equity instruments.
• These decisions further support a trend towards narrowing VAT exemptions for intermediation services in the financial area.
• Financial industry players should reassess their VAT qualifications to mitigate risks and explore opportunities for tax efficiency.

In the financial sector, the VAT exemption for securities intermediation (article 21 para. 2 letter e VAT act) is among the most important and relevant. In two recent decisions, the Swiss Federal Administrative Court has overthrown longstanding practices regarding intermediary services. For the financial services area, these decisions – if upheld by the Federal Supreme Court – have far-reaching consequences for the past and the future.

Denial of “independent” intermediary services besides wealth management (decision A-5793/2022, dated 18 June 2024)

In decision A-5793/2022, the Federal Administrative Court addressed the qualification of execution services provided by an external asset manager (EAM) to wealth management clients. Besides a monthly management fee (0.2% of the assets under management), the EAM received a brokerage fee (1.2% of the transaction value) for executing capital markets transactions. Further, the EAM entered into a brokerage agreement with Bank B. Under this agreement, the EAM was entitled to the mentioned 1.2% brokerage fee, and Bank B provided custody bank and online brokerage services to the EAM's clients. Although the brokerage fee was distinct and separately charged, the SFTA and the Federal Administrative Court argued that the EAM's brokerage activities were ancillary to its primary wealth management service. Specifically, the EAM was seen not to exercise an "independent" intermediary activity. Instead, the EAM's orders to Bank B to execute the securities transactions just implemented the investment strategy under the wealth management mandate. The court further argued that in the absence of such a wealth management mandate, the client would have instructed the custody bank directly for the securities transaction. Hence, the EAM's brokerage activities were considered purely auxiliary to the primary service (wealth management).

Accordingly, the court qualified the brokerage fee as a taxable turnover, following the VAT treatment of the wealth management service. Interestingly, the court explicitly differentiated between the EAM (for whom the brokerage fees are a taxable turnover) and the bank managing the custody account. In contrast to the EAM, the custody bank can offer tax-exempt intermediary services besides being mandated under a (taxable) wealth management agreement. In this regard, the court overlooks that an intermediary does not need to carry out securities transactions itself; it is sufficient if it contributes to the conclusion of a contract for such transaction. Further, an asset manager of a bank has a comparable function and may also act as an intermediary for transactions entered by other (group) entities. In line with this, Art. 21 para. 3 VATA supports that the exemption generally applies independently of the function of the supplier.

How does this impact the financial sector?

Both decisions were appealed to the Federal Supreme Court. Nevertheless, they illustrate the tendency in case law and administrative practice to limit the VAT exemption for intermediation services gradually. Strictly applied, the court's decisions create a risk for substantial additional VAT claims for all open tax years — especially for actors in the financial industry who do not stay on top of developments and do not adapt their VAT qualification in time. In turn, the two decisions may not invariably have a negative impact. Especially for primary market placements, decision A-2585/2022 from 29 June 2023 creates room to improve tax efficiency by reducing the overall VAT leakage. Hence, businesses providing intermediary services in the financial sector should review the respective VAT qualification in light of the decisions discussed, even if the previous assessment was in line with the common interpretation of administrative practice in the past. Further, the VAT considerations are not isolated, as there are also pending court cases regarding securities turnover duty, especially on the qualification as a securities dealer under stamp duty law.