Treating an investment fund asset management or performance fee as being to value added tax (VAT) has been a standard and accepted practice in the past. However, recent developments have shown that no Swiss VAT is due on such services in certain instances.
Fund managers in the institutional fund management sector often receive their management fees directly from the investors in the fund (for instance, Swiss pension funds) rather than from the fund itself. Previously, the payment of these fees triggered VAT in Switzerland.
It was common for Swiss pension funds to invest into units or shares of investment funds (both Swiss and foreign investment funds). These investment funds usually offered separate share classes for institutional investors, such as for Swiss pension funds (e.g., institutional share classes). In a standard set-up, the fund manager of the underlying investment fund performed asset management services for the investment fund, and was remunerated for these services by way of asset management fees and/or performance fees that were charged by the fund manager directly to the investment fund.
However, a different fee model often applied for institutional share classes. In that situation, the fund manager usually invoiced the institutional investors (e.g., the Swiss pension funds) directly for their share of the asset management / performance fees. This approach allowed the fund manager to adopt a tailored pricing model for each institutional investor. When the underlying investment fund was based in Switzerland (i.e., a Swiss investment fund), the fund manager usually added Swiss VAT—currently at a rate of 7.7%—to the invoices for fund asset management services sent to Swiss pension funds.
When the underlying investment fund is based outside of Switzerland (a foreign investment fund), no Swiss VAT was typically charged on the invoice issued by the foreign fund manager; however, Swiss pension funds instead usually account for and pay Swiss VAT (7.7%) under the reverse-charge mechanism.
Given recent developments, Swiss fund managers of a Swiss regulated investment fund do not need to add VAT at a rate of 7.7% on the asset management / performance fees invoiced to institutional clients (such as Swiss pension funds) because the actual service is the management of the assets of a regulated Swiss investment fund, which is VAT-exempt in Switzerland. The fact that the Swiss pension fund is paying the invoice directly is not relevant.
The same principle also applies to asset management / performance fees charged by foreign fund managers of foreign incorporated regulated investment funds. In such situations, the Swiss institutional investors (the Swiss pension funds) do not account for and pay Swiss VAT under the reverse-charge mechanism on the fund asset management / performance fees because this is a supply between two foreign entities.
It is prudent to carefully review all facts and circumstances, including the specific legal set-up, before ceasing to apply Swiss VAT. In particular, other services such as asset allocation, research, advisory, and managed accounts provided by fund or asset managers to Swiss institutional investors are usually still subject to Swiss VAT.
Read a June 2018 blog item posted by the KPMG member firm in Switzerland
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