European Union - Value Added Tax - Exemptions
Finanzamt Frankfurt am Main V-Höchst v Deutsche Bank AG: Court of Justice of the European Union (Second Chamber): (Judges Cunha Rodrigues (president), Lohmus, Rosas (rapporteur), O Caoimh, Arabadjiev): 19 July 2012
Council Directive (EC) 2006/112 (on the common system of value added tax), so far as material, provides: ‘56(1) The place of supply of the following services to customers established outside the community, or to taxable persons established in the community but not in the same country as the supplier, shall be the place where the customer has established his business or has a fixed establishment for which the service is supplied, or, in the absence of such a place, the place where he has his permanent address or usually resides… (e) banking, financial and insurance transactions, including reinsurance, with the exception of the hire of safes… 135(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.’
In 2008, Deutsche Bank provided, either itself or through subsidiaries, portfolio management services to client investors. Those client investors instructed Deutsche Bank to manage securities, at its own discretion and without obtaining prior instruction from them, in accordance with the investment strategy variants chosen by them and to take all measures which seemed appropriate for those purposes. Deutsche Bank was entitled to dispose of the assets (securities) in the name and on behalf of the client investors. The client investors paid an annual fee amounting to 1.8% of the value of the managed assets.
That fee consisted of a share for asset management amounting to 1.2% of the value of the managed assets and a share for buying and selling securities amounting to 0.6% of the value of the assets. The fee also covered account and portfolio administration and front-end fees for the acquisition of shares, including units in funds that were managed by undertakings belonging to Deutsche Bank.
At the end of each calendar quarter and at the end of each year, each client investor received a report on the progress of the asset management and was entitled to terminate the instruction at any time with immediate effect. When it submitted its provisional VAT return for the May 2008 tax period, Deutsche Bank informed the German Tax Office that it assumed that the services supplied in connection with portfolio management were exempt from tax under paragraph 4(8) of the German Law on Value Added Tax of 2005 (UStG), if they were supplied to client investors in German territory and in the rest of the territory of the EU.
It further stated that it assumed, in accordance with paragraph 3(4)(6)(a) of the UStG, that those services were not taxable if they were supplied to client investors established in third countries. The tax office rejected those arguments and, on 29 April 2009, issued a VAT interim payment notice for the May 2008 tax period in which it treated the transactions relating to the portfolio management for the client investors in question as taxable and non-exempt. The objection Deutsche Bank raised in respect of that payment notice was rejected.
By contrast, the Finance Court upheld the action brought by Deutsche Bank. The tax office in turn appealed on a point of law to the Bundesfinanzhof (the referring court) against the judgment delivered by the Finance Court. Since it had doubts, inter alia, as regards the categorisation of portfolio management with regard to VAT exemptions, it decided to stay the proceedings and refer certain questions to the Court of Justice of the European Union for a preliminary ruling.
Having regard to those considerations and to provide the referring court with a useful response, the court considered that, by its second question, the referring court sought, in essence, to categorise, for VAT purposes, the portfolio management service at issue in the main proceedings, 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, and, in particular, to determine whether that activity should be regarded as a single economic supply.
By its first question, which it was appropriate to examine next, the national court asked, in essence, whether article 135(1)(f) or (g) of Council Directive 2006/112 (on the common system of value added tax) (the directive) was to be interpreted as meaning that portfolio management, such as that at issue in the main proceedings, was exempt from VAT under that provision. By its third question, the referring court asked whether article 56(1)(e) of the directive was to be interpreted as covering only the services referred to in article 135(1)(a) to (g) of the directive or also portfolio management, even if that transaction was not subject to the latter provision.
The court ruled: (1) Having regard to the foregoing, the answer to the second question referred was that a portfolio 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 took decisions on the purchase and sale of securities, and implements those decisions by buying and selling the securities, consisted of two elements which were so closely linked that they formed, objectively, a single economic supply (see  of the judgment).
(2) Having regard to the foregoing, the answer to the first question referred was that article 135(1)(f) or (g) of the directive should be interpreted as meaning that portfolio management, such as that at issue in the main proceedings, was not exempt from VAT under that provision (see  of the judgment).
(3) Having regard to the foregoing, the answer to the third question referred was that article 56(1)(e) of the directive 2006/112 should be interpreted as covering not only the services referred to in article 135(1)(a) to (g) of the directive, but also portfolio management services (see  of the judgment).