In institutional fund management business, fund managers often receive their management fees directly from the investors in the fund (e.g. Swiss pension funds) rather than from the fund itself. Previously, the payment of these fees triggered Swiss VAT (currently 7.7%), albeit incorrectly.
It is very common for Swiss Pension Funds (PFs) to invest into untis/shares of investment funds (both Swiss and foreign investment funds). These investment funds usually offer separate share classes for institutional investors, such as for Swiss PFs (e.g. institutional share classes).
In a standard set-up, the fund manager of the underlying investment fund performs asset management services for the investment fund, and is remunerated for such services by way of asset management fees and/or performance fees that are charged by the fund manager directly to the investment fund.
However, a different fee model often applies for institutional share classes. In such cases, the fund manager usually invoices the institutional investors (e.g. the Swiss PFs) directly for their share of the asset management / performance fees. This approach allows the fund manager to adopt a tailored pricing model per institutional investor.
Where the underlying investment fund is based in Switzerland (i.e. Swiss investment fund), the fund manager usually adds Swiss VAT, of currently 7.7%, to the invoices for such fund asset management services which are sent to Swiss PFs.
Where the underlying investment fund is based outside of Switzerland (i.e. foreign investment fund), no Swiss VAT is typically charged on the invoice issued by the foreign fund manager, however Swiss PFs instead usually account for and pay Swiss VAT (7.7%) under the reverse charge mechanism.
Treating the investment fund asset management / performance fee as subject to Swiss VAT was standard and accepted practice in the past. However, recent developments have shown that no Swiss VAT is due on such services any more.
Therefore, the Swiss fund manager of a Swiss regulated investment fund should not add 7.7% Swiss VAT on asset management / performance fees invoiced to institutional clients (such as Swiss PFs). This is because the actual service is the management of the assets of a regulated Swiss investment fund, and such service is Swiss VAT exempt. The fact that the Swiss PF is paying the invoice directly is not relevant.
The same principle also applies with regards to asset management / performance fees charged by foreign fund managers of foreign incorporated regulated investment funds. In such cases, the Swiss institutional investors (e.g. Swiss PFs) should not account for and pay Swiss VAT under the reverse charge mechanism on the fund asset management / performance fees as this is a supply between two foreign entities.
However, it is necessary to carefully review all facts and circumstances, including the specific legal set-up, before ceasing to apply Swiss VAT. In particular, other services such as asset allocation, research, advisory, managed accounts etc. provided by fund or asset managers to Swiss institutional investors are usually still subject to Swiss VAT.
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