Key takeaways

• Alignment with the EU framework for financial intermediation is welcomed, as it helps to avoid another specific "Swiss finish".
• Success-based remuneration and neutrality are critical for VAT-exempt intermediation.
• Contractual structure and documentation are essential for VAT classification.
• Execution-related commissions may be taxable if they are economically tied to asset management.
• Regulatory asymmetries between banks and independent asset managers may require policy attention/adjustments.

In more detail

The outlines of the distinction between vatable "introduction of customers/clients" services and VAT-exempt "brokerage" services have often been subject to disputes and litigation. This is a key question for financial intermediaries and always comes with a "price tag" (potential tax occulte (shadow tax)) for the parties involved in any M&A, financial, distressed or wealth management transaction.

Legal framework

Under Article 21, Abs. 2, Ziff. 19 of the Swiss VAT Act, VAT exemptions apply to financial transactions such as the intermediation of securities, derivatives and shares. The Swiss Federal Tax Administration (SFTA) elaborates on this in VAT Industry Guidance No. 14, which defines intermediation as an independent activity that facilitates a contract between two parties without the intermediary becoming a party or having an interest in the contract's content.

Swiss jurisprudence (particularly the Swiss Federal Supreme Court decision BGE 145 II 270) emphasises that a causal role in contract formation and success-based remuneration are key indicators of exempt intermediation. This aligns with EU case law, notably the Deutsche Bank ruling (C-44/11), which held that portfolio management services combining advisory and execution elements are not exempt from VAT.

Administrative court decision

Corporate Finance AG facilitated capital increases by introducing investors to Swiss companies against a success-based finder's fee. The SFTA classified these services as vatable, arguing that the issuance of new shares constituted a "non-supply" and that the firm's role was advisory rather than intermediary.

The Swiss federal administrative court ruled in favour of Corporate Finance AG, qualifying its services as VAT-exempt and emphasising the following:

• The success-based finder's fee indicated an instrumental role in contract formation.
• Corporate Finance AG had no contractual authority or "own" interests in the contract content.
• The activity involved active facilitation, not just client introduction.

The court referenced BVGer A-5117/2023, which held that, even when a mortgage broker had contracts with both parties, this did not negate intermediary status provided that neutrality was maintained.

Swiss Federal court decision

An external asset manager (EAM) levied from its clients a 1.2% fee (or commission) for trade execution (which was actually regularly executed by a custodian bank) and a 0.2% management fee on the assets under management (notably, the split between the commission and the management fee was also debatable under Transfer Pricing aspects).

The EAM argued that the underlying service for the commission was a VAT-exempt intermediation service, separate from the general asset management services.

However, the Swiss Federal Supreme Court classified the trade execution services as "ancillary services" to the management services. Thus, the commission was subjected to VAT, as it met the following ancillary services tests:

• Economic subordination to and usual occurrence with the main service: In this case, the execution service was economically integrated within the asset management, and the EAM did not execute trades directly.
• No independent purpose for the client: In this case, the trade services for the courtage were not independently structured.

Policy implications

The rulings highlight a regulatory asymmetry: Banks benefit from broader exemptions under the all-in-fee practices, while EAMs face stricter scrutiny. This raises concerns about competitive neutrality and legal certainty.

Swiss courts increasingly align with VAT decisions from the Court of Justice of the European Union (CJEU), particularly the Deutsche Bank ruling (C-44/11), which effectively regards discretionary and non-discretionary portfolio management services as one single taxable supply. This trend enhances harmonisation between EU and Swiss laws but may reduce flexibility for Swiss financial intermediaries. However, there has not been any landmark decision from the CJEU on the scope of intermediary services since the CSC Financial Services (C-235/00) decision in 2001.

The two court decisions provide further clarity on the definition of tax-exempt brokerage services. In the decisions, it has been emphasised that the success-based compensation is a strong indicator for a tax-exempt brokerage service. This is a clear criterion that the SFTA should implement into its administrative practice and guidelines.

Furthermore, the Swiss courts have upheld EU case law by preventing a deviation known as the "Swiss finish" regarding the criterion of independent intermediary activity. The court ruled that an intermediary can have contractual relationships with both parties and still be considered independent. This means that, if an intermediary is also an asset manager, the brokerage commission they receive remains exempt, as the fee is transparently disclosed and typically waived by the client in writing. This decision ensures equal opportunities for both domestic and foreign intermediaries, preventing competitive distortions and the migration of service providers abroad.

Next steps

It is advisable that financial intermediaries continually monitor their VAT liability in Switzerland. Please contact your Swiss Baker McKenzie contact, or one of the authors listed to review your VAT status.