Under the Markets in Financial Instruments Directive (MiFID) II, Swiss businesses providing both execution and research services will have to price and supply these services separately (unbundled). The separately supplied research service will be subject to 7.7% rate of value added tax (VAT).
MiFID II will be effective in the European Union as of 1 January 2018. As part of the investor protection framework within MiFID II, financial institutions are to unbundle execution services (purchase / sale) and research services in connection with client investments. Since Swiss financial institutions conduct operations with EU businesses, the new EU directive rules will also affect Swiss financial institutions.
Investment managers are traditionally not charged a separate fee for research services by financial institutions (such as banks and brokers). In other words, these services are usually embedded in the execution fee and borne by the end-client (for instance, an investment fund or pension fund).
Under MiFID II, financial institutions providing both execution and research services must price and supply them separately—i.e., unbundle the research component from the execution component. Two main strategies are currently being discussed in this regard:
Based on the current Swiss VAT practice, when research services by regulated financial institutions (banks or brokers) are bundled with execution services, they are classified as Swiss VAT-exempt. Unbundled and separately invoiced research services are classified as a VAT-able supply.
MiFID II will result in either additional Swiss VAT costs or Swiss VAT savings for Swiss businesses providing or receiving research services.
Affected entities (investment managers, banks, brokers, pension funds, investment funds, etc.) will need to consider the Swiss VAT implications in pricing the offered or requested services. Therefore, all Swiss entities currently providing or receiving execution services (bundled with research services) need to consider and prepare for the possible VAT implications of MiFID II.
Read an October 2017 blog item posted by the KPMG member firm in Switzerland
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