The new legislative package applicable to financial services and financial institutions could have unexpected VAT implications – whether the scope for VAT exemption could be narrowed or expanded remains to be seen.
On 15 June 2018, Swiss Parliament adopted an extensive new legislative package containing code of conduct provisions for financial service providers and standardizing the authorization rules for certain financial institutions. The new legislative acts are the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA). On 6 November 2019, the Federal Council furthermore issued issuing the Financial Services Ordinance (FinSO), the Financial Institutions Ordinance (FinIO) and the Supervisory Organisations Ordinance (SOO), which contain the implementing provisions for FinSA and FinIA. These legislative acts and ordinances came into force as of 1 January 2020.
FinSA, FinIA and the related ordinances have wide-reaching implications on the sector. The legislation introduces new concepts and abolishes some established ones. This also impacts a number of other legislative acts, such as the Swiss VAT Act (VATA). In the context of VAT, the most notable change is the replacement of the concept of “distribution”, with that of “oﬀering”. The notion of “distribution”, which is currently deﬁned in Art. 3 of the Swiss Collective Investment Schemes Act (CISA), is effectively abolished with the legislative changes. In its place, Art. 3 lit g of FinSA introduces “oﬀering”. For reference, the previous wording of Art. 3 CISA can be found here.
Find out about the newly introduced wording of Art. 3 lit g FinSA and Art. 3 lit 6 of FinSO.
In short, the wording in CISA used to define distribution as “any offering of collective investment schemes, and any marketing of collective investment schemes…”. The new wording of FinSA instead defines offering as “any invitation to acquire a financial instrument that contains sufficient information on the terms of the offer and the financial instrument itself”.
Furthermore, Art. 3 of CISA previously outlined activities that were explicitly excluded from the concept of distribution. These activities have been moved into Art. 3 lit. 6 of FinSO, which could have an impact on how the VAT treatment of such activities is qualified.
The potential relevance of these legislative changes to the VAT treatment of certain services, becomes evident once one looks at how the wording of VATA has been amended to reflect the changes. Until 31 December 2019, the VAT exemption for distribution of investment funds was linked to the definition of distribution in Art. 3 in CISA. As this article no longer exists, the wording in Art. 21 para 2 lit 19 (f) VATA has also been revised as of January 1.
The old wording of VATA can be found here.
The new wording, valid as of 1 January 2020 can be found here.
Since “distribution” as a concept no longer exists as of 1 January 2020, the new wording of VATA instead refers to the “oﬀering” of collective investment schemes. Interestingly, the new wording makes no reference to certain activities closely linked to distribution, which were formerly explicitly referenced in the VAT exemption, such as the provision of information regarding collective investment schemes. The definitions for similar activities can now be found in FinSO, but unlike in the previous wording of VATA, there is no mention of them in the VAT exemption.
Furthermore, while the previous definition of “distribution” included a reference to marketing, the new concept of “offering” does not, and nothing is stated in this respect in the new wording of VATA.
While the difference between “distribution” and “offering” may not seem significant at first sight, these differences in the wording around the VAT exemption raise questions around the scope of the VAT exemption going forward.
One might ask if the failure to reference the so-called “non-offering” (or previously “non-distribution”) as well as “marketing” activities, could have been an intentional act, aimed at restricting the VAT exemption. At the time of writing, we have however seen no indication that this was the intention.
It is of course possible that the VAT exemption was never intended to be so extensive as to cover marketing as well as provision of information about collective investment schemes. These references were introduced in connection with the revision of the CISA in 2015 and were in fact received with some surprise in VAT circles. In many instances however, the Swiss Federal Tax Administration (SFTA), continued to apply the exemption reasonably restrictively, even where there could have been room to argue for exemption (and restricted input VAT deduction). From this perspective, the new wording could have been a means of realigning the wording of the legislation with the intended scope of the exemption. For those businesses who have beneﬁted from the more extensive wording of the exemption, this may come as an unwelcome surprise.
Questions have also been raised around the term “offering” versus “distribution”, specifically whether one could be considered semantically more extensive than the other, and whether this could have an impact on the scope of the VAT exemption. Although this cannot be excluded to have an impact down the line, it does not seem very likely that this is intended.
As with any legislative change, we recommend our clients to take a close look at their processes and VAT treatment applied, perform an analysis of potential areas of risk (or opportunity), and determine the steps required in order to ensure compliance, both going forward as well as for the past.