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European Union: VAT developments in related to negotiation services
The European Court of Justice (ECJ) recently issued its judgement in a case related to the supply of services consisting in the negotiation of credits, which are in principle VAT exempt. This ECJ case provides with useful guidance in order to define the scope of certain VAT exemptions applicable to financial services.
Overview of the case
In the main proceedings of this case (the "Volker Ludwig" case), the applicant is a self-employed financial adviser who in addition acts as sub-agent on behalf of a financial advisory company on the basis of a commercial agency agreement. Through the intermediary of its sub-agent, the financial advisory company makes available to private persons a range of financial products, such as credit facilities, in respect of which the general conditions have been defined in advance with the lending financial institutions. The role of the sub-agent consists in analysing the financial situation of potential clients and in proposing, based on this analysis, financial products appropriate to their needs. Upon subscription to a credit facility, the lending financial institution pays a commission to the financial advisory company, which then pays a commission to its sub-agent for his role in the conclusion of the contract. The client does neither pay any commission to the financial advisory company nor to the sub-agent.
The Court concluded that the fact that a taxable person analyses the financial situation of clients canvassed by him with a view to obtaining credit for them does not prevent the service supplied as being a VAT exempt negotiation of credit. According to the Court, the service of negotiation of credit rendered by the sub-agent has to be considered as the principal service. The provision of financial advice limited to help the client choosing which financial products are best adapted to his situation and to his needs, is ancillary to this principal negotiation service. Consequently the supply of financial advice shares the same VAT treatment as the negotiation service, i.e. it is VAT exempt.
The Court also stated that the fact that the sub-agent has no contractual link with any of the parties to a credit agreement to the conclusion of which he has contributed and that he does not establish direct contact with one of those parties does not preclude that sub-agent from providing a VAT exempt service consisting in the negotiation of credit.
Impact for Luxembourg businesses
In this case, the Court clearly stated that the concept of negotiation does not necessarily presuppose that the negotiator, as sub-agent of the main agent, enters into direct contact with both parties to the contract, in order to negotiate its terms, provided, however, that his activity is not limited to dealing with some of the clerical formalities related to the contract. In addition, the very fact that the terms of the credit agreement have been fixed in advance by one of the parties to the contract cannot, as such, preclude the supply of a negotiation service for the purposes of the Luxembourg VAT exemption, given that, according to the Court, the activity of negotiation may be limited to pointing out to one party to the contract suitable opportunities for the conclusion of such a contract.
Many aspects of the reasoning of the Court should be extended to negotiation services in relation with transactions in securities, which should be viewed as good news for Luxembourg's Financial Centre.