On 19 July 2012, the Court of Justice of the European Union (ECJ) delivered its judgment on the Deutsche Bank case (case C-44/11), confirming that discretionary fund management services for individuals (DFM services) are one single supply of a service which is VAT taxable.

Deutsche Bank provides DFM services to individual investors. The investors instruct Deutsche Bank to manage securities for them in accordance with a chosen strategy. Deutsche Bank does so at its own discretion and without obtaining prior instruction by the investors. Deutsche Bank also buys and sells securities in the name and on behalf of the investors and also renders the portfolio administration services.

The VAT Directive provides for an exemption of the management of special investment funds in which assets/investments are pooled by multiple investors. Also, transactions in securities are exempt from VAT. The VAT Directive does not explicitly exempt DFM services for individuals. In the underlying case, the ECJ had to decide whether DFM services rendered to individual investors can fall under the exemption for transactions in securities, since they cannot fall under the other exemption for management of special investment funds.

The case revolves around two main questions that have been addressed by the German court. Firstly, should the DFM services rendered by Deutsche Bank be considered as multiple services or as one single service? Secondly, are the DFM services taxable or exempt from VAT on the basis of the aforementioned exemption for transactions in securities?

The ECJ held that the DFM services that Deutsche Bank rendered comprise of advisory services on the one hand and the buying and selling of securities on the other hand. The advisory services and the buying and selling of transactions are core to DFM services and cannot be separated for VAT purposes. Further, these services are not only inseparable, but must also be placed on the same footing. According to the ECJ, it is not possible to take the view that one must be regarded as the principal service and the other as the ancillary service.

This one service does not fall under the exemption for transactions in securities and is therefore VAT taxable. In order to fall under this exemption, a performance must form a distinct whole, which is characteristic and essential for transactions in securities. The ECJ has previously decided that for this it is required that the service can change the legal- and financial relationship between Deutsche Bank's client and other parties (sellers and buyers of securities). Since only the purchase and sale of securities on behalf of the client changes his legal- and financial position, and the advisory element of the DFM service itself does not, the ECJ decided that such a service as a whole is not characteristic and essential for transactions in securities.

This decision is not only relevant to assets managers, but to other financial- and insurance institutions as well. Depending on the nature of the rendered services, financial institutions should review whether or not VAT is due in relation to the rendered services.

HMRC already announced to issue further guidance on the VAT treatment of discretionary assets management services following this judgment. HMRC held off from publishing definitive guidance on the VAT treatment of the management of assets portfolios, awaiting the outcome of the Deutsche Bank case. We expect that tax authorities of other EU Member States will follow with measures as well.