ECJ Decision Dated 19 July 2012 Re-garding VAT On Portfolio Management

In a decision dated 19 July 2012, the European Court of Justice ("ECJ") held that portfolio management services, where a taxable person (bank) on the basis of its own discretion makes decisions on the purchase and sale of securities in the name and on behalf of investor clients and consummates the relevant transactions, is subject to value added tax (VAT); such individual portfolio management services neither constitute tax-exempt negotiations of transactions in securities nor tax-exempt management of investment funds.

1. IMPACT OF THE DECISION

   Based on the recent decision of the ECJ, VAT will be levied on individual portfolio management services as a rule. This is in line with the approach pursued by the German fiscal authorities already in the past. The recent decision of the ECJ renders obsolete however a previous ruling of the German Federal Fiscal Court ("BFH") which could be used to support a tax exemption of portfolio management services.

   As a consequence, a tax exemption with respect to portfolio management services can be available only in the context of funds (cf. section IV. below).

2. BACKGROUND

   The ECJ made the judgment dated 19 July 2012 (Case C-44/11) in answer to a question for a preliminary ruling referred to it by the BFH (resolution dated 28 October 2010). The background of the reference for a preliminary ruling was as follows.

   In a decision dated 11 October 2007, the BFH had held that portfolio management carried out by banks is exempt from VAT under § 4 no. 8 lit. e of the German VAT Act ("UStG") insofar as it consists of transactions in securities and the negotiations of such transactions; the same applied with respect to transactions, including negotiations, in shares in companies and associations, § 4 no. 8 lit. f UStG.

   However, on 9 December 2008 the German federal ministry of finance ("BMF") released a so called non-application decree in respect of the foregoing BFH decision. According to the BMF, portfolio management carried out by banks constituted a single type of activity with the purpose of enhancing the capital return, and consummated transactions were an integral part of these activities, i.e. means to achieve the purpose. As a consequence, the tax exemption with respect to transactions in securities, including negotiations of such transactions, was not available.

   Moreover, the BFH obviously became skeptical about its own legal analysis presented in its ruling dated 11 October 2007 and resolved on 28 October...