Deutsche Bank AG basically provided two types of services as part of the management of securities (portfolio management): on the one hand, it managed securities, at its own discretion, for remuneration (decided on the buying and selling of securities) and, on the other hand, it took all measures which seemed appropriate during the management of the securities (i.e. it implemented the decisions taken in the client’s name).
Pursuant to the Sixth VAT Directive, the security trading transactions, including negotiation, were exempt from tax with the exception of security management.
Deutsche Bank AG took the view that its portfolio management activity qualified as tax exempt as transactions in securities trading and the negotiation of such transactions as defined in the Sixth VAT Directive (and the German VAT Act).
However, the German authorities found that the services were taxable as asset management services as defined in the Sixth VAT Directive (and the German VAT Act).
Main question asked from the European Court of Justice
Does it constitute a single supply of service or separate supplies of services if two types of services are supplied as part of portfolio management: decisions are made for remuneration at the service provider’s discretion regarding the purchase and sale of securities and the decisions are implemented in the client’s name by actually selling or buying securities?
ECJ first declared that the portfolio management service supplied by Deutsche Bank AG qualifies as a complex service consisting of a number of elements. Similarly as in case C-41/04 of Levob, ECJ confirmed that it can be regarded as a single service if the transactions are so closely linked that they form, objectively, a single, indivisible economic supply.
It explained that during the management of securities (portfolio management),Deutsche Bank AG basically provided two types of services: a service of analysing and monitoring the assets of client investors, on the one hand, and a service of actually purchasing and selling securities on the other.
These two services may be supplied separately from one another (e.g. the client may request a consulting service only if he would like to make and implement decisions on financial operations himself). However, the average client investor, in the context of a portfolio management service such as that performed by Deutsche Bank, sought precisely a combination of these two elements. For deciding, based on proper expert analysis, on the best approach to the purchase, sale or retention of securities would be pointless if not effect were given to that approach. (point 26) For this reason, the services supplied by Deutsche Bank AG do not only constitute a single service but are also inseparable and must be placed on the same footing. Based on the above, ECJ came to the conclusion that the single service was subject to VAT as only one element of the service (the purchase and sale of securities) complied with the VAT exemption rules of the Sixth VAT Directive. The tax exemption relating to the transactions in securities trading and the negotiation of such transactions must be interpreted strictly as it represents an exemption from the main rule, i.e. to the taxability of the supply of service.
In the decision, ECJ further refined the principles laid down in relevant earlier decisions. Based on this case, the characteristics of complex transactions can be summarized in the following, non-exhaustive and non-conclusive list:
- The management of securities (portfolio management) as part of which two types of services are supplied: a management of securities for remuneration based on the service provider’s own discretion, on the one hand (the making of decisions regarding the purchase and sale of securities),and the implementation of these decisions on the other (i.e. the sale and purchase of securities in the client’s name) has to be regarded as a single supply of service.
- If only one element of the service (the purchase and sale of securities) satisfies the rules of VAT exemption, the single portfolio management transaction will qualify VAT-able as tax exemption must be interpreted strictly.