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.
VAT qualification of intermediary services depending upon the underlying transaction (decision A-2585/2022, dated 29 June 2023)
In another recent decision handed down by the Federal Administrative Court, the taxpayer acted as an intermediary for companies to place their newly issued shares as well as their treasury shares in the market. Regarding the fees received, the taxpayer argued in favor of a tax-exempt intermediation of securities. At the same time, the SFTA saw a taxable turnover. First, the court referred to the leading case on the qualification of the proceeds from the share issuance and the sale of treasury shares as non-remunerations. In its further deliberations on the interpretation of the relevant article 21 para. 2 letter e VAT act, the court reasoned that a tax-exempt intermediary service requires the underlying transaction to be exempt from VAT as well. In line with this, the court concluded that – deviating from the situation under EU VAT laws – intermediary services for the placement of equity instruments do not fall within the exemption from VAT but are fully taxable. In this respect, the decision indicates no differentiation between issuing new shares in a capital increase and selling existing shares held by the company (treasury shares). Accordingly, any intermediary service in the context of a primary market placement of equity would be taxable. The impact goes well beyond intermediation services for businesses raising capital; placement fees for funds may also become taxable under the Federal Administration Court's reasoning. One step further, the proceeds from debt financing and the issuance of debt instruments are also non-remunerations in terms of VAT. Hence, placement, sales and issuing fees for bonds and certain other financial instruments, such as structured products, may also fall within the taxable area. Furthermore, the same may apply mutatis mutandis to redemption fees.
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.
