Following the European Court of Justice (ECJ) decision in the Deutsche Bank case concerning the value added tax (VAT) treatment of portfolio management services the Irish Revenue issued an eBrief on 4 September 2015 to explain its approach to the issue in the light of that ECJ decision.

VAT on portfolio management services

The ECJ in the Deutsche Bank case determined that discretionary portfolio management services were to be treated as a single service that is subject to VAT, rather than treating them as several separate services for VAT purposes. Therefore, the services of analyzing and monitoring assets of clients and purchasing and selling securities were to be treated as a single supply of services.

The different elements of the service were regarded by the ECJ as inseparable and to be placed on the same footing for VAT purposes. They were so closely linked that they formed a single economic supply that it would be artificial to split. The whole fee for the services was therefore subject to VAT.

The eBrief issued by the Irish Revenue explains however that if a fee is charged just for each transaction of the purchase or sale of shares or securities a VAT exemption can still apply to the fee if certain conditions are fulfilled. These conditions are that the contractual arrangements must provide for charging the fees on a transaction by transaction basis; and that these arrangements must be clearly shown in the invoices.

Management of a Special Investment Fund

Another aspect of the ECJ decision was that the portfolio management activity engaged in by Deutsche Bank did not conform to the concept of “management of a special investment fund” under Art. 135 (1) (g) of the EU VAT Directive 2006/12. That Article provides that member states shall exempt the management of special investment funds as defined by Member States.

The decision of the ECJ was that the VAT exemption relates to transactions relating to a business of undertakings for collective investment. In other words, this exemption applies to management of a collective investment fund but not to a situation where a portfolio management is purchasing and selling shares and securities for a client investor who owns these securities.

Application of the new approach

The Irish Revenue has updated its VAT Manual to reflect the new treatment. The Revenue is taking this approach to portfolio management services in future but will not go back and review previous periods where the VAT treatment was different.