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VAT treatment - negotiating financial services Back  
The recent decision or the European Court of Justice (ECJ) in the Ludwig case provides useful clarification on the scope of the VAT exemption for financial services performed by agents/intermediaries says John McGlone.
This case is important for arrangers/brokers of credit, corporate finance advisors involved in arranging share transactions and agents in the sale of financial products.

In summary, the Court held that it is not necessary for an agent to have a direct contractual relationship with one of the parties to the main contract, and that sub-agency services can also qualify for exemption. Furthermore, VAT exempt ‘negotiation’ is to be widely construed to include the mere highlighting of opportunities to enter into contracts. The ruling appears to have increased the scope for parties involved in financial services transactions to qualify for VAT exemption.

The case concerned a self-employed financial advisor who acted on behalf of a German investment broker. Where the financial advisor’s client agreed to take up a loan, the advisor prepared a contractual offer which was sent to the broker who checked and sent it to the lender. The broker received commission from lenders. The broker then paid the financial advisor under an agency agreement. No commission was paid by the borrowing client. The financial advisor had no contract with the lender or the client (only the broker) and had no direct contact with the lender.

The Recast VAT Directive (formerly 6th Directive) exempts from VAT ‘the granting and the negotiation of credit and the management of credit by the person granting it.’ Like the Irish VAT legislation, the German legislation is in line with the Directive but the German Federal Tax Court held that exemption only applied where the service of ‘negotiation of credit’ was rendered to a party to the actual credit agreement. The conclusion from this was that where a sub-agent provided services to a main agent, those services could not be exempt as no direct agency agreement existed with one of the parties to the loan. The case was appealed to the German courts who sought guidance from the ECJ on two issues.

The first was whether it was the financial advisor’s provision of financial advice (a non-exempt activity) or the ‘negotiation of credit’ which should be regarded as the main service. The second was whether contractual links were required between the advisor (as negotiator) and the other parties, and whether the negotiator had to have contact with the lender as well as the borrowing client.

Was ‘negotiation’ the main supply?
In considering the first question the ECJ was dealing with a common VAT conundrum – whether there was one single supply of exempt negotiation of credit or two supplies of taxable financial advice and exempt negotiation of credit. Using the principles set out in previous cases, the Court ruled that exemption cannot be excluded purely because financial advice is also provided. The Court held that the ‘negotiation of credit’ was the decisive and principal service both for the borrowers and the lenders and that the financial advice was merely ancillary.

What is ‘negotiation’?
The financial advisor’s role in this case was limited to making contact with his client, pointing out the availability of loan finance (the terms of which were fixed i.e. the advisor did not have authority to negotiate on them), and assisting with the completion of relevant forms etc. Notwithstanding all of this the Court held that the service could be regarded as VAT exempt ‘negotiation’.

The Court found that the absence of contractual links and direct contact does not preclude exemption. Exemption should be assessed on the nature and purpose of the supplies, not in terms of who performs or receives them.

‘Negotiation’ is a term appearing in a number of headings of VAT exempt financial services. This case highlights that VAT exemption is not limited to the traditional view of a negotiator, and can include persons who do not have a formal contractual relationship with either party, may only have contact with one party and may have a role limited to pointing out opportunities to complete a contract to their client.

The full implications of this ruling will develop over the coming months but it seems that qualifying for exemption under the heading of ‘negotiation’ has just gotten a little easier.

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