On the 19th July 2012, the Court of Justice of the European Union confirmed the AG’s opinion and decided that discretionary portfolio management services supplied by Deutsche Bank were not exempt from VAT.

The Court went as far as ruling that fees and charges for securities transactions made in the course of providing management services could not be separated from the advisory element for VAT purposes and therefore, management and transactions in securities should be regarded as a single, taxable supply. Deutsche Bank provided discretionary portfolio management services and charged a fee for asset management and a fee for buying and selling securities. The Court decided that the two services form a single supply on the basis that both transactions were closely linked. The Court upheld the AG’s opinion that asset management is generally taxable as otherwise there would have been no need to provide for a specific exemption with respect to management services supplied to special investment funds. Article 135(1)(g) of Directive 2006/112/EC contains a mandatory exemption from VAT in respect of management of special investment funds as defined by Member States.

This decision will impact the funds management industry in many ways. Fund managers and industry players might rethink the way they provide management and other services and possibly make a clear distinction and charge separately for?management and?services relating to buying and selling securities. The VAT charge on discretionary fund management services should not, in theory, translate into an additional?cost?for the?customer since the fund managers would be able to recover part of the VAT paid on supplies and services relating to taxable management services. We expect tax authorities throughout the EU to announce revised guidelines and policies soon.

For further information please contact Damien Fiott.