On 5 April 2012 the Swiss Federal Tax Administration (FTA) published at last the final version of the new VAT Info No. 14 (Info 14), which relates to the finance industry and is based on the VAT law which came into effect on 1 January 2010. The final version of the corresponding new VAT Info No. 15 regarding the lump-sum input VAT ratio calculation for banks has still not been published. Below we summarize the main points of interest in Info 14.
Main change – new VAT concept of acting as an intermediary
The main change in Info 14 compared to the old Brochure 14 (based on the old VAT law which came into effect on 1 January 2001) lies in the concept of “acting as an intermediary” in the finance industry. It is now defined as a separate activity which consists of bringing about the conclusion of a contract in the field of money and capital transactions between two parties, where the intermediary is not himself a party to the contract and does not have any own interest in the content of the contract.
According to the new concept, the commission paid for intermediation classifies for Swiss VAT in the same way as the underlying contract. Thus for example, the commission paid for acting as an intermediary in a taxable fiduciary transaction is taxable itself. However, the commission paid for acting as an intermediary in an exempt-without-credit sale of securities is exempt-without-credit.
The new definition of “acting as an intermediary” is not only relevant for banks, but also for other financial institutions. There are currently large uncertainties regarding both the interpretation and the practical impact of this new definition. It remains to be seen how this new concept will be interpreted by the FTA in practice. Info 14 does not provide clear guidelines and definitions in this respect.
It appears likely that the new definition of “acting as an intermediary” will have a negative impact on various Swiss banking / brokerage entities. Swiss entities and especially Swiss branches of a foreign head office – which sell, market or introduce products or services of their non-Swiss group entities (e.g. entities resident in the UK) in the Swiss market – will generally no longer be able to consider that the commission income received for providing these services is tax-exempt-with-credit for VAT purposes (as it was in certain cases under the old Swiss VAT law).
Under the new definition of “acting as intermediary” parts of these services are likely to be classified as exempt-without-credit. This will result in higher Swiss VAT costs for these entities, since they will no longer be able to claim the corresponding input VAT relief. As there are no clear guidelines from the FTA, entities affected by this should obtain a ruling from the FTA.
Date when the change comes into force
Another important question is the date from which the change in the intermediation concept applies. The general rule laid down by the FTA is
- that changes which derive from a changed wording in the VAT law come into force – like the new VAT law – as of 1 January 2010,
- whereas changes which are not based on a different text of the VAT law come into practice at the beginning of the semester following their publication.
At the beginning of Info 14, there is a statement that it applies from 1 January 2010. However, it can be argued that the change in the intermediation concept is not based on an alteration in the words of the VAT law: The explanations in Info 14 refer only to the specific provisions in the field of money and capital transactions. Thus, the legislation is identical to the old VAT law. This change should thus come into force as of 1 July 2012.
Rulings by the FTA given in recent months to Swiss entities located in the French-speaking part of Switzerland appear to indicate that the FTA regards the change in the intermediation concept as coming into force as at July 2012, rather than being back-dated to 1 January 2010. But again – there is some uncertainty here, and a ruling from the FTA with regard to the effective date should be obtained in cases where the change may be relevant or significant.
Passive investment companies
After much discussion about the possible changes of practice in the last few years, the FTA has decided to stick to the old existing practice regarding passive investment companies (PIC). This can be summarized as follows: A PIC is a company (not being an investment fund) in an offshore location which
- has only a registered office address, but no staff or infrastructure such as actual office premises;
- has no business activity, but only an activity limited to the holding of an account or securities; and
- receives only services relating to the administration of the assets which it holds (custody, portfolio and asset management services).
For the Swiss VAT classification of a service provided to a PIC the domicile of its (ultimate) shareholders needs to be considered. Should the majority (> 50%) of the shareholders be domiciled in Switzerland, the services provided to the PIC must generally be treated as being a supply in Switzerland with a VAT of 8%.
Our experience shows that the Swiss VAT treatment of PICs generally does not create large concerns for Swiss banks, because the Swiss banks rely on to the Swiss “Know Your Customer” (VSB) rules (form A). However, some banks obviously have difficulties to identify the “majority shareholdership”, because they only have information on the head-count of the beneficial owners and their domicile.
Services related to investment funds
There is no change in practice regarding the services related to investment funds subject to the Swiss Collective Investment Schemes Act (CISA). There is an express exemption from VAT (without credit) for the following services: the administration and distribution of Swiss funds subject to the CISA, and distribution services performed by the official representative of non-Swiss funds with distribution authorization in Switzerland according to CISA.
We regularly see an unused opportunity for services provided by Swiss sub-asset managers / advisors to Swiss funds subject to CISA. These could be classified as exempt-without-credit – provided that the set-up is correct – leading to VAT savings. With regard to the distribution / placement of non-Swiss investment funds not subject to CISA, it is likely that due to the new concept of “acting as an intermediary” at least the placement fee paid on issuance of the fund units is now VAT exempt-without-credit, by contrast with the old practice.
Application of the 30/70 rule for all-in fees
The new VAT law states that – where one combined fee is paid for several different services, some of which are taxable and some of which are exempt-without-credit – the entire fee may be treated for VAT purposes in the same way as the predominant service if that service amounts to at least 70% of the entire fee. In our experience, there is a certain optimization potential here in relation to all-in fees for asset management mandates of Swiss-domiciled financial institutions, i.e. to treat the entire all-in fee as Swiss VAT exempt-without-credit.
Outsourcing of services
Under the old VAT law the FTA had a general practice that – where services are outsourced by a Swiss bank to another provider (e.g. controlling, processing, cash management services, general back office services etc.) – those outsourced services were generally regarded as a preparatory effort subject to Swiss VAT.
Under the new Swiss VAT law and according to Info 14 this practice has been relaxed, i.e. such services may now qualify as exempt-without-credit where
- these services form part of a unity or package of services which belong together and for which significant responsibility is borne by the second provider; and
- the outsourced services by the second provider are exempt services by reason of their nature.
This situation results in considerable opportunities for a reduction of the final Swiss VAT.
You should review your situation to see if you are affected by any of the matters mentioned above – in particular by the change relating to intermediation.