In a recently published decision of the tax court of Hessen, the court had to address whether an intermediary service that also contains elements of consultancy could be considered a single intermediary service or whether the intermediation merely represented an ancillary element to the mediated supply (case reference 6 k 1970/03). The particular feature of this case was that the question whether or not a VAT exemption of the intermediary service was available depended on the overall characterization of the intermediary and consultancy elements, which will be of interest to partially or fully VAT-exempt investors that use a financial advisor in M&A and other financial transactions, where VAT – if chargeable – would constitute a final cost.
The case involved a German entity that had concluded a contract with a financial advisor who, per the agreement, had to provide a number of different services relating to the sale of shares, ranging from establishment of a bidder/purchaser list and preliminary talks with potential bidders, establishment of a sale memorandum, checking of bids, assistance in the coordination of the due diligence of the bidders, support in the establishment of the company’s share valuation, consulting in relation to the negotiation strategy with the target, etc. with a potential outsourcing of part of the consulting elements to third party consultants. At the same time, certain services were specifically excluded in the contract, e.g. tax consultancy, legal consultancy, accounting consultancy or technical consultancy. The parties had agreed on a monthly fixed fee that could subsequently be set off against a contingent success fee if there was a successful bid.
While the tax office characterized the entire service as either a single composite supply with the consultancy service being the pre-dominant element or reasoned that at least the service owed by the financial advisor would have to be apportioned into a VAT-exempt intermediary service and a VATable consultancy service, the taxpayer argued that the service provided by the financial advisor must be characterized completely as an intermediation of a VAT-exempt financial transaction under the German VAT Code because the consultancy element was a necessary but only complementary part of the intermediary service and this was supported by the agreement on a success fee.
The tax court ruled that, in this particular situation, the service provided by the financial advisor constituted an entirely VAT-exempt intermediation of a financial service because the interpretation of the term “intermediation” must be made in accordance with EU law and not on the basis of the domestic interpretation and scope of a “trade agent” or “broker”. According to this interpretation, a service can be characterized as a separate intermediation service if it is not part of the mediated transaction itself and if it is not simply a sub-delegated service element of that of the principal itself (in this case, the sale of shares). While the court conceded that there were strong consultancy elements in the contractual obligations of the financial advisor, it ruled that in this case these only constituted a means to provide the financial intermediary service owed, which in turn had the objective of successfully completing the intended share sale transaction by the principal.
A similar case, argued by Deloitte, was also decided in favor of the taxpayer by the same tax court at the end of 2009. Each case, however, should be evaluated on its own facts before drawing conclusions or analogies since in certain circumstances, depending on the perspective of the principal or the financial advisor and their place of business, it may be preferable to have the service bundle treated as a consultancy service. If you have any questions, please contact Sonja Mühleisen or your regular Deloitte Indirect Tax contact.
