Under MiFID II, financial institutions providing both execution and research services must price and supply them separately (i.e. unbundled). As the separately supplied research service is subject to 7.7% VAT, the new rule will impact Swiss businesses providing or receiving research services.
MiFID II will be effective in the European Union (EU) as of 1 January 2018. As part of the investor protection framework within MiFID II, financial institutions need to unbundle execution services (purchase/sale) and research services in connection with client investments. Since Swiss financial institutions operate with EU businesses, the new EU regulations will also affect Swiss financial institutions.
Investment managers are traditionally not charged a separate fee for research services by financial institutions (e.g. brokers, banks), i.e. such service is usually embedded in the execution fee and borne by the end client (e.g. investment fund, pension fund).
Practice post-MiFID II
Under MiFID II, financial institutions providing both execution and research services must price and supply them separately, i.e. unbundle the research component from the execution component.
Two main strategies are currently being discussed on the market: (1) Investment managers may agree on an overall research budget with their clients, and administer and charge research costs separately. (2) Investment managers may take over the research costs themselves and possibly raise their investment management/advisory fees accordingly.
Swiss VAT treatment
Based on the current Swiss VAT practice, when research services by regulated financial institutions (i.e. banks/brokers) are bundled with execution services, they are classified as Swiss VAT-exempt.
Unbundled and separately invoiced research services are classified as a VAT-able supply.
Due to this, MiFID II will result in either additional Swiss VAT costs or Swiss VAT savings for Swiss businesses providing or receiving research services. All affected entities (e.g. investment managers, banks/brokers, pension funds, investment funds, etc) will need to consider the Swiss VAT impact in the pricing of the offered/requested services.
Therefore, all Swiss entities providing or receiving execution services today (bundled with research service) should start to analyse the likely Swiss VAT impact of MiFID II and to implement appropriate measures to manage such impact.