VAT Treatment of Depository Services and Global Custody Services
On 23 May 2022, the Revenue Commissioners (Revenue) published a new Tax and Duty Manual, VAT treatment of depository services and global custody services (Manual). The Manual provides helpful guidance on the VAT treatment of depositary services and global custody services provided in respect of an Irish investment fund.

 

On 23 May 2022, the Revenue Commissioners (Revenue) published a new Tax and Duty Manual, VAT treatment of depository services and global custody services (Manual). The Manual provides helpful guidance on the VAT treatment of depositary services and global custody services provided in respect of an Irish special investment fund.

Depositary services and global custody services

An Irish regulated investment fund must appoint a depositary located in Ireland. A depositary is required to supervise the investment activities of the fund. It must also report to the shareholders/unitholders annually as to whether the fund has operated in accordance with its founding documentation and the applicable regulations. This function is often referred to as an “oversight” role. In addition to the oversight role, depositaries typically provide a package of other services that are often referred to as “global custody” services, such as safekeeping of assets, security settlement, income collection, corporate action processing, cash management and securities lending services.

VAT treatment

The depository's oversight role is subject to VAT at the standard rate (23%). 

The Court of Justice of the European Union in Abbey National (C-169/04), held that the fund management exemption does not cover the functions of a depositary of UCITS funds as those functions are not the “management” of UCITS but involve the “control and supervision of their activities. 

Revenue has accepted that a global custody service, which includes taxable elements, such as physical safe-keeping and oversight, can constitute a "composite supply" of VAT exempt financial services, in cases where the taxable elements are incidental.

Mixed supplies of goods and services

Special rules apply where one or more goods and services are sold together for a single payment. This is relevant where each of those supplies is taxable at a different VAT rate. As a starting point one must first decide whether one is making a multiple supply or a composite supply

A multiple supply is where each of the items being sold together for one consideration is capable of being supplied independently in its own right. 

A composite supply is where there is a principal element as well as an ancillary element in the supply. In general, the ancillary element would not be sold on its own without the principal element. The ancillary elements of a composite supply are not physically or economically dissociable from the principal supply.

The VAT chargeable on a composite supply is at the rate appropriate to the principal supply. Therefore, where the “principal” component of a global custody service (which includes oversight), is VAT exempt financial services, the entire supply would be VAT exempt. This will be a question of fact in each case, based on the services supplied.

Comment

The VAT treatment of depositary services and global custody services requires careful analysis to determine whether a particular supply is a composite supply, and if so, to identify the principal and ancillary elements and the relevant VAT rates. This analysis should be conducted on a case-by-case basis, but the following principles are instructive:

  • Where the oversight function is the only service supplied, the supply is taxable at the standard rate (23%).
  • Where a composite supply is provided where the oversight function is the principal supply, the composite supply is taxable at the standard rate (23%).
  • Where a composite supply is provided where the “global custody” function is the principal supply, the composite supply is VAT exempt.
  • Where the supply comprises separate supplies of oversight services and global custody services, the former will be taxable, and latter will be VAT exempt

The Manual provides helpful guidance on the VAT treatment of depositary services and global custody services. A link to the Manual is available here.

All asset managers and investment funds should monitor the VAT treatment of their depository services and be aware of whether the VAT exempt financial services component of the service is the principal or ancillary element of the supply. Please contact us if you have any queries or wish to discuss the VAT treatment of your depository service. 

Contributed by Robert Kearns

 

Key Contacts

Ted McGrath Tax Partner with William Fry Tax Advisors Ltd

Anne Tobin Tax Partner with William Fry Tax Advisors Ltd

Paul Eglington Senior Associate

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