EU VAT on outsourced banking services

Mon 26th Mar 2018

A new outsourced financial services tax case, reviewing the VAT exemption on outsourced bank support services, has been sent to the European Court of Justice for consideration by the German courts. The outcome may be large, irrecoverable tax charges for banks that have outsourced ancillary back-office administrative services.

Financial services, including banking and insurance, is exempt from EU VAT. This is largely because of the complexity of determining where value is created, and therefore how should be taxed. In this case, a German an outsourcing company set-up, operated and replenished cash-points (Automated Teller Machines – ATMs) for bank clients. The operator considered itself as part of an exempt financial service for EU VAT, and therefore did not charge its bank clients VAT.

However, the German federal fiscal court, BFH, challenged this as merely a payment and administrative service, and therefore taxable. The German court has referred the question to the European Court of Justice, as the ultimate EU law review court. The German court has requested a clarification following the ECJ’s Bookit ruling for outsourced cinema cinema ticket booking. This case found there was no exemption applicable.

This request for a preliminary ruling relates to the interpretation of Article 135(1)(d) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1, ‘the VAT Directive’).

Should the ECJ rule that the services are taxable, then banks will be charged VAT. As banks are exempt for EU VAT, they will not be able to recover the charge and will therefore make a loss. This may lead to banks in-housing such services in future to avoid VAT liabilities.

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