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.


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).


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 2010 to refer to the ECJ questions on the interpretation of the underlying provisions of the Sixth Council Directive on the VAT System ("VAT Directive").


1. Facts

The following facts gave rise to the questions referred for a preliminary ruling: A German bank provided portfolio management services to client investors. Those clients instructed the bank to manage securities, at its own discretion and without obtaining prior instructions from them, in accordance with investment strategy variants chosen by them and to take all measures which seemed appropriate for those purposes. The 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 a fixed percentage of the value of the assets under management. That fee consisted of a share for asset management and a share for buying and selling the securities.

2. Line of Argumentation

  1. One Single Supply

    According to the ECJ, the portfolio management services carried out by the bank consist of two elements, viz. analyzing and monitoring the assets of the client investors, on the one hand, and of actually purchasing and selling securities on the other. Both elements are linked so closely that they form a single economic supply. Therefore, both elements are to be regarded as one service for VAT purposes.
  2. No Management of Investment Funds

    First, the court states that individual portfolio management does not fall within the scope of application of the VAT exemption with respect to management of investment funds as defined by Member States (cf. art. 135 para. 1 lit. g VAT Directive; § 4 no. 8 lit. h UStG).

    Transactions covered by that exemption are only those which are specific to the business of UCITs (i.e. undertakings for collective investment in transferable securities or other liquid assets). By contrast, that exemption does not apply to portfolio management on behalf of a client investor, who retains ownership of the individual securities.
  3. No (Negotiations of) Transactions in Securities

    One basic element of portfolio management consists in analyzing and monitoring the assets of the client investors. These are services which do not necessarily involve transactions which are liable to create, alter or extinguish parties' rights and obligations with respect to securities, i.e. which - if considered separately - are not tax exempt under art. 135 para. 1 lit. f VAT Directive (§ 4 no. 8 lit. e or lit. f UStG).

    Since portfolio management services may be taken into account for VAT purposes only as a whole, it cannot be covered by the aforementioned tax exemption.


The current decision might affect the VAT treatment of management of investment funds within the meaning of German investment legislation as well as other funds. In this context, the following developments are of interest.

As mentioned above, the VAT Directive provides for a tax exemption with respect to the management of investment funds. Germany implemented this provision in § 4 no. 8 lit. h UStG, but this tax exemption applies only to investment funds (Investmentvermögen) as defined by German law. As a consequence, other funds, in particular private equity funds, do not enjoy this exemption. It is a controversial issue whether this infringes European Law; in our opinion this is the case. This situation could be remedied by change to EU law: Changes to the VAT treatment of insurance and financial services have been discussed on the EU level for quite some time already, and such changes might have an impact on the scope of application of the above-mentioned VAT exemptions.

Further areas of uncertainty concern the scope of the VAT exemption with respect to the management of investment funds. Currently, a reference for a preliminary ruling from the BFH is pending before the ECJ (Case C-275/11); the question referred to the ECE deals with the scope of the VAT exemption in situations where a part of the management services is delegated to external service providers.

We will keep you informed of these developments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.