In a landmark VAT case, the Swiss Federal Supreme Court has decided on the VAT treatment of intermediation services, providing long awaited clarity and requiring taxpayers to reassess past and future VAT positions.
The VAT treatment of intermediation in financial services has been the subject of disputes in many jurisdictions across Europe, including Switzerland. In the EU, the Court of Justice of the European Union (CJEU) has explored the topic in a number of cases (e.g. C-453/05 Volker Ludwig), generally deciding that even without direct representation there could be intermediation for VAT purposes based on a broader assessment of the facts and circumstances.
Historic uncertainty caused by conflicting practices
In Switzerland, the VAT treatment of intermediation has long been particularly uncertain, as the courts and the Swiss Federal Tax Administration (SFTA) have taken diametrically opposing views on the topic. Since 2011, SFTA practice has been largely aligned to that of the CJEU: that intermediation does not require a contractual relationship between the intermediary and either of the parties between which a financial service is ultimately provided. In most cases in which there is intermediation in effect, SFTA practice has been that the VAT treatment of the service follows that of the underlying product being intermediated, typically a financial product, thus rendering the intermediation exempt as well. The Swiss Federal Administrative Court practice on the other hand has stated that direct representation is an absolute requirement for intermediation from a VAT perspective. According to the Court practice, in all cases other than direct representation, the service constitutes a taxable supply of “introducer” or similar services. From the perspective of the taxpayers, this has resulted in uncertainty both in terms of determining the tax liability of services provided, as well as when calculating the input VAT recovery rate.
Clarity at last – but is this the finish line?
The decision of the Swiss Federal Supreme Court finally brings an end to the uncertainty – it is now clear that direct representation is not required for a service to constitute intermediation from a VAT perspective. Effectively, this widens the scope of potentially exempt supplies, which as always, is a double-edged sword.
Many businesses have taken the approach, considered prudent, of only treating services where direct representation existed as VAT exempt intermediation. This has ensured that these service providers have not underreported output VAT. On the other hand, it may have positively influenced their input VAT recovery position, which the SFTA could now question in light of the newest developments.
To summarize, below is a short history of how the practice has evolved:
- Until 2010 – the SFTA practice states that intermediation requires direct representation
- 2011 – the SFTA updates its practice, stating that direct representation is not required – effectively aligning the practice with that of the CJEU
- 2017 – the Swiss Federal Administrative Court negates the SFTA practice, stating that direct representation is required for intermediation
- 2019 – the Swiss Federal Supreme Court confirms the SFTA’s view, realigning Swiss practice with that of the EU (C-235/00 CSC Financial Services et al)
What comes next, and what should businesses do?
In light of the decision of the Swiss Federal Supreme Court, we expect the SFTA to update their practice to clarify the VAT treatment of revenues that should remain taxable, such as finder’s fees. Companies engaged in intermediation of financial services as well as in “introducer” activities, should however already take a closer look at the VAT treatment applied to revenues linked to possible intermediation, as well as on the impact on their input VAT position. Given that the Court’s decision confirms the view of the SFTA, it will be particularly important to assess the need for (and the costs and benefits of) remediation of past VAT treatment.