VAT treatment of services specific to and essential for exempt insurance and financial services and the management of investment funds - Main contents

Document date	26-02-2010
Publication date	22-01-2013
Reference	6881/10
From	Presidency
To	Working Party on Tax Questions - Indirect Taxation (VAT)
External link	original PDF
Original document in PDF

COUNCIL OF PUBLIC Brussels, 26 February 2010 (10.03)

THE EUROPEAN UNION (OR. es)

6881/10

Interinstitutional File:

2007/0267 (CNS) LIMITE

FISC 20

NOTE from: Presidency to: Working Party on Tax Questions – Indirect Taxation (VAT) Subject: VAT treatment of services specific to and essential for exempt insurance and

financial services and the management of investment funds

• 1. 

  The purpose of this note is to continue the discussions on the special provision for services that are specific to and essential for exempt insurance and financial services referred to in Article 135(1)(a) of the proposal for a Directive on the common system for value added tax, as regards the treatment of insurance and financial services.

• 2. 

  At its meeting on 28 September 2009, the Working Party on Tax Questions discussed a note from the Swedish Presidency (13057/09 FISC 112) suggesting a legal text for this provision based on the ECJ's ruling in case C-2/95, Sparekassernes Datacenter (SDC). The note

  included some examples of services from the Commission proposal for a Regulation which, in the view of the Swedish Presidency, could be specific to and essential for the exempt service and entailed changes in the legal and financial situation.

6881/10 ste/NT/ms 1

• 4. 

  At the meeting on 28 September 2009, delegations differed in their positions as to whether

  the text of the Directive should include a reference to the need for changes in the legal and financial situation of the parties. The text proposed by the Presidency seeks to adopt an intermediate solution as regards Article 135(1)(a), with a view to bridging the gap between the delegations' positions without sacrificing clarity of drafting.

• 5. 

  In addition, at the meeting on 16 July 2009 some delegations suggested that the text should

  not cover management of investment funds or intermediary services, and the Swedish Presidency amended the text accordingly. However, it is evident, from various consultations of the sector, that delegating the management of investment funds is a very common transaction which should be regulated. In the Presidency's opinion, delegation of this kind also constitutes an outsourcing of functions. The Presidency proposes that its exemption be provided for whenever a group of services is outsourced which constitute a distinct whole and are specific to and essential for the provision of the functions to which the text refers – in line with the bundling system discussed by the Working Party.

• 6. 

  As regards the outsourcing of investment fund management functions, there are two options.

  Option B is more restrictive than option A, but easier to implement. Option A is more consistent with the concept of outsourcing employed in the Directive, but more complicated to implement since it requires interpretation as to whether the services which are included in the outsourced function constitute a distinct whole and whether they are specific to and essential for the provision of that function.

• 7. 

  We propose a new wording of Article 11 of the Regulation, with a view to determining the

  services included in each of the three functions which form a constituent element of the management of investment funds.

• I) 

  Article 135(1)(a) of the Directive.

  Option A

  "The exemption provided for in points (a) to (gb) of paragraph 1 shall apply to the supply of any constituent element of an insurance or financial service which itself constitutes a distinct whole and is specific to and essential for the supply of the exempt service and shares the financial or insurance character of that service.

  The exemption provided for in point (gc) of paragraph 1 shall apply to the supply of any of the functions referred to in that point, where the function constitutes a distinct whole and the services included therein are specific to and essential for the supply of that function.

  The exemption shall not extend to the isolated supply of services included in any of the functions referred to in point (gc) of paragraph 1."

  Presidency note:

  The first paragraph of Article 135(1)(a) refers to the outsourcing of certain financial and insurance services. For this outsourcing to be exempt, some delegations consider that the only necessary condition is that these services constitute a distinct whole and are specific to and essential for the supply of the exempt service. Another, smaller group of delegations, however, would prefer to keep the reference to "changes in the legal or financial situation of the parties".

  In the Presidency's opinion, there is no need to refer to such changes, since it would appear to

  be implicit in considering a service to be specific and essential – i.e. a service which is not an

  adjunct to the exempt service but a constituent element thereof.

To bridge the gap between these two positions, the Presidency has included the expression

"shares the financial or insurance character of that service". This means that in order for an outsourced service to be exempt, its nature must be such that it entails a financial or insurance component. This would exclude from exemption all services relating to solely administrative, legal or accounting functions and other purely material services such as the printing of cheque books, installation of cash machines, etc.

With regard to the second paragraph of this article, the Presidency considers that the exemption of a group of services supplied within the context of investment fund management (bundling) is closely linked to the outsourcing of functions as defined in the Directive.

The addition of two new paragraphs to Article 135(1)(a) is intended to lay down concrete criteria for determining when the outsourcing of certain services is exempt and when it is not. The Presidency's opinion is that exemption should apply to the outsourcing, as a whole, of each of the functions referred to in the definition (portfolio management, administration and marketing), but not to the separate activities which these may comprise. Consequently, if the function of administering an investment fund as a whole is outsourced, the supply of this overall service will be exempt. On the other hand, if what is outsourced is only one, or a number, of the activities included in the concept of administration, the supply of these services will only be exempt if they constitute a distinct whole and are specific to and essential for the supply of that function.

The services included in each function are specified in the Regulation. However, given the large number of services which can be supplied and the fact that this sector is constantly evolving, the Presidency considers that it should be an open list. For instance, take the case of an investment fund management company which decides to outsource one of its three functions. If all the services included in the function are outsourced, this transaction will be exempt. If not all the services are outsourced, it will be necessary to assess whether the outsourced services constitute a distinct whole and are specific and essential – i.e. whether they are considered sufficient to perform the function which is delegated. The fact that the list will be open will mean that some of the services comprised in the function being delegated may not be specified in the Regulation, which lists services only by way of example, but may nonetheless form part of the function in question. A closed list of services would be very restrictive.

Option B

"The exemption provided for in points (a) to (gb) of paragraph 1 shall apply to the supply of any constituent element of an insurance or financial service which itself constitutes a distinct whole and is specific to and essential for the supply of the exempt service and shares the financial or insurance character of that service.

The exemption provided for in point (gc) of paragraph 1 shall apply to the supply, as a whole, of all the services included in each of the functions referred to in that point.

The exemption shall not extend to the isolated supply of services included in any of the functions referred to in point (gc) of paragraph 1."

Presidency note:

In this case, outsourcing will only be exempt if it comprises a function in its totality. Consequently, if outsourcing only encompasses part of the group of services which form part of the function in question, even if that part includes a group of services which constitute a distinct whole and are specific to and essential for that function, exemption will not apply since the function has not been outsourced in its totality.

This approach is obviously more restrictive than option A. However, its practical implementation would be simpler and it avoids the risk of extending the scope of the exemption unduly.

II) Article 11 of the Regulation.

Article 11

• 1. 

  The concept of "portfolio management function" contained in the definitions of "management of investment funds" and "management of pension funds" in Article 135(1)(gc) of Directive 2006/112/EC i shall cover at least the following:

• a) 

  strategic asset management;

• b) 

  operational asset management; 2. The concept of "administration function" contained in the definitions of "management of investment funds" and "management of pension funds" in Article 135(1)(gc) of Directive 2006/112/EC i shall cover at least the following:

• a) 

  legal and fund management accounting services;

• b) 

  the preparation of tax returns;

• c) 

  regulatory compliance monitoring;

• d) 

  maintenance of unit-holder registers;

• e) 

  contract settlements (including certificate dispatch);

• f) 

  record keeping.

• 3. 

  The concept of "marketing function" contained in the definitions of "management of investment funds" and "management of pension funds" in Article 135(1)(gc) of Directive 2006/112/EC i shall cover at least the following:

• a) 

  market research on investor profiles;

• b) 

  investor consultations;

• c) 

  unit issues and redemptions;

• d) 

  valuation and pricing; e) issue of mandatory reports and documents.

• 4. 

  The definition of "management of investment funds" contained in

Article 135(1)(gc) of Directive 2006/112/EC i shall not cover the following:

• a) 

  oversight of the fund by the depositary;

• b) 

  safe custody, security safe-keeping and control;

• c) 

  internal and external fund auditing;

• d) 

  development of systems, such as planning and implementation of new technology,

  major enhancements to existing systems and systems maintenance;

• e) 

  fund advertising.

Presidency note:

In paragraph 1a), "strategic asset management" will include services such as investment decisions, categories of assets in which it is intended to invest, segments, geographical areas and economic sectors, risk diversification strategies, etc.

In paragraph 1b), "operative asset management", the services included will cover a more operational aspect of management: relations with the broker, execution of purchase or sale orders, collection of dividends, exercise of voting rights associated with shares acquired by the fund, organisation and implementation of share and bond loans, etc.

The Presidency has doubts as to whether to include all these services in the text of the Regulation as examples of strategic and operative management, since it is not certain that such a detailed listing is appropriate.

With regard to the marketing function referred to in paragraph 3, it could be said to be closer to the investor and to include relations between investor and fund. For this reason, the Presidency considers that some services which are included in the administration function in Directive 85/611 i should be included in the marketing function, such as investor consultations, valuation and pricing and unit issues and redemptions – points a), b) and c). As regards the issue of mandatory reports and documents – point e) –, this refers to annual and monthly reports and the prospectus (Article 68 of Directive 2009/65/EC i).

III) Examples of services included in and excluded from exemption in connection with outsourcing.

Services common to all the exempt services in Article 135(1):

Typically included:

• 1. 

  the cession, renewal, amendment and rescission of contracts relating to an exempt

  insurance or financial service (Art. 13(1)(c) COM Reg., for explanation of the service see COM room document of 19 March 2008).

  Typically excluded:

  • 1. 

    safekeeping (Art. 13(2)(a) COM Reg. + COM room document) 2. administrative tasks (Art. 13(2)(b) COM Reg. + COM room document) 3. […] 4. legal, accounting, auditing and bookeeping services (Art. 13(2)(d) COM Reg. + COM

  room document)

• 5. 

  services related to regulatory compliance (Art. 13(2)(e) COM Reg. + COM room

  document)

• 6. 

  identity verification, money laundering and anti-fraud checks (Art. 13(2)(f) COM Reg.

  + COM room document)

• 7. 

  data collection services for the recycling of banknotes and coins (Art. 13(2)(g) COM

  Reg. + COM room document)

• 8. 

  marketing, research, identification and development of new products or opportunities

  (Art. 13(2)(h) COM Reg. + COM document)

• 9. 

  the supply and design of software (Art. 13(2)(i) COM Reg. + COM room document)

• 10. 

  hire of security boxes and other secured spaces (Art. 13(2)(j) COM Reg. + COM

  room document)

• 11. 

  services which grant the right or the option of receiving goods or services (Art. 13(2)(b)

  COM Reg. + COM room document)

135(1)(a) Insurance and reinsurance

Typically included:

• 1. 

  underwriting of risk (Art. 14(1)(a) COM Reg. + COM room document)

• 2. 

  claims handling (Art. 14(1)(c) COM Reg. + COM room document)

Typically excluded:

• 1. 

  damage assessment (Art. 14(1)(c) COM Reg. + COM room document)

135(1)(b) Granting of credit

Typically included:

• 1. 

  underwriting of credits (Art. 15(1) and (2) COM Reg. + COM room document)

135(1)(c) Guaranteeing of debts

Typically excluded:

• 1. 

  The sale of repossessions after mortgage default (Art. 16(2) COM Reg. + COM room

  document)

135(1)(d) Transfer of debts and claims

Typically included:

Typically excluded:

Presidency note: This new heading does not appear in the COM proposal for a Directive. The Presidency invites MS and the COM to provide examples.

135(1)(e) Financial transfer

Typically included:

• 2. 

  authorization and verification of payments, (Art. 18(1)(e) COM Reg. + COM room document)

135(1)(f) Transactions concerning financial deposit and account operation

Typically included:

• 1. 

  automated acceptance of money for deposits (Art. 17(6) COM Reg. + COM

  room document)

• 2. 

  authorisation and verification of payments (Art. 18(1)(e) COM Reg. + COM

  room document)

Typically excluded:

• 1. 

  general printing of cheque books (Art. 18(2)(a) COM Reg. + COM room document) 2. the supply of blank cards (Art. 18(2)(b) COM Reg. + COM room document) 3. Internet hosting (Art. 18(2)(c) COM Reg. + COM room document) 4. the rental of terminals and other machinery for the processing of card payments

  (Art. 18(2)(d) COM Reg. + COM room document)

• 5. 

  sorting and counting of money for the purpose of making a deposit (Art. 17(1)

  COM Reg. + COM room document)

Presidency note:

We have transferred "sorting and counting of money for the purpose of making a deposit" to excluded services, taking the view that it does not share the character of an exempt financial service. If a bank pays an external company to provide this service, it should be a non-exempt transaction. It is not a service which is specific to and essential for the making of a financial deposit– it is purely ancillary.

135(1)(g) Currency exchange and provision of cash

Typically excluded:

• 1. 

  […] storage of money (Art. 19(2)(a) COM Reg. + COM room document)

• 2. 

  courier and security transport services (Art. 19(2)(b) COM Reg. + COM room document)

• 3. 

  the publication of information on exchange rates (Art. 19(2)(c) COM Reg. + COM room document)

• 4. 

  the installation of cash machines (Art. 19(2)(d) COM Reg. + COM room document)

135(1)(ga) Transactions in securities, excluding their safekeeping and management

135(1)(gb) Transactions in financial derivatives excluding their safekeeping and management

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