The European Court of Justice (First Chamber) ruled that the fact that a taxable person analysed the financial situation of clients canvassed by him with a view to obtaining credit for them did not preclude recognition of the service supplied as being a negotiation of credit which was exempt from VAT under art. 13(B)(d)(1) of Council Directive 77/388 (the sixth directive) if the negotiation of credit offered fell to be considered as the principal service to which the provision of financial advice was ancillary, with the result that both shared the same tax treatment. It was for the national court to determine whether the particular circumstances fulfilled those conditions in each case. Moreover, the fact that the taxable person had no contractual link with any of the parties to a credit agreement to the conclusion of which he had contributed and that he did not establish direct contact with one of those parties did not preclude that taxable person from providing a service of negotiation of credit which was exempt under art. 13(B)(d)(1).

Facts

The taxpayer was a self-employed financial adviser who acted on behalf of DVAG on the basis of a commercial agency agreement. Through the intermediary of its subagent acting in the capacity of financial adviser, DVAG made available to private persons a range of financial products, such as credit facilities, in respect of which the general conditions had been defined in advance with the lending financial institutions ('the lenders'). To that end, the financial adviser canvassed potential clients in the name of DVAG, in order to invite them to an interview, the purpose of which was to review their financial situation and to determine their possible investment needs.

Following an analysis of the financial situation of a person thus contacted, conducted with the assistance of a computer software programme provided by DVAG, the financial adviser proposed to that person those financial products appropriate to his needs. If the person indicated that he was in favour of a credit facility, the adviser prepared a firm contractual offer which was sent, after signature by the client, to DVAG, which checked that it met the necessary legal conditions. DVAG sent the contractual offer to the lender which was free to accept or reject it, or to amend its terms.

If a contract was concluded, DVAG was rewarded by the lender with a commission. DVAG then paid to the financial adviser, in his capacity as subagent, and in return for his role in the conclusion of the contract, a commission, the amount of which depended on the terms of the commercial agency agreement. The client, for his part, did not pay any commission, either to DVAG or to the adviser. The financial adviser was responsible for following up relations with his clients after the conclusion of each credit agreement. In this case, the taxpayer, in his capacity as subagent, received from DVAG a net commission after contributing to the conclusion of a credit agreement during the first quarter of 2005. On the view that the transaction concluded by him, which also gave rise to payment of the commission, was exempt from VAT pursuant to art. 13(B)(d)(1), the taxpayer contested the application of VAT at the rate of 16 per cent to his commission by the German tax administration. The Finance Court stayed the proceedings and referred to the European Court of Justice for a preliminary ruling.

Issue

Whether the taxpayer's activities of negotiating credit or giving of financial advice constituted the supply of services classified as exempt from VAT under art. 13(B)(d)(1) of the sixth directive.

Decision

The European Court of Justice (First Chamber) (ruling accordingly) said that it followed from art. 2(1) of the sixth directive, which determined the scope of the directive, that every supply of a service must normally be regarded as distinct and independent and that a supply which comprised a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system. Consequently the essential features of the transaction had to be ascertained in order to determine whether the taxable person was supplying the customer, envisaged as being a typical consumer, with several distinct principal services or with a single service. There was in particular a single supply in cases where one or more elements were to be regarded as constituting the principal service, whilst one or more elements were to be regarded, by contrast, as ancillary services which shared the tax treatment of the principal service. A service was ancillary to a principal service if it did not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied.

In this case, the fact, first, that the services rendered by DVAG and its subagent were remunerated by the lenders only on condition that the clients approached and advised by the financial adviser entered into a credit agreement suggested that the negotiation should be regarded as the principal service and the giving of advice as merely ancillary. Second, the negotiation of credit appeared to be the decisive service both for the borrowers and for the lenders, in so far as the activity of giving financial advice occurred only in a preliminary phase and was limited to helping the client choose, from among the various financial products, which were best adapted to his situation and to his needs.

The terms used to specify the exemptions covered by art. 13 of the sixth directive were to be interpreted strictly, since they constituted exceptions to the general principle that VAT was to be levied on all services supplied for consideration by a taxable person. Further, those exemptions constituted independent concepts of Community law whose purpose was to avoid divergences in the application of the VAT system as between one member state and another and which had to be placed in the general context of the common system of VAT. The term 'negotiation' used in points (1) to (5) of art. 13(B)(d) was not defined by that directive. The court had nevertheless held in the context of point (5) of that provision that the concept of 'negotiation' applied to the activity of an intermediary who did not occupy the position of a party to a contract relating to a financial product and whose activity amounted to something other than the provision of contractual services typically undertaken by the parties to such contracts. Negotiation was, in effect, a service rendered to and remunerated by a contractual party as a distinct act of mediation. In that regard, the purpose of such an activity was to do all that was necessary in order for two parties to enter into a contract, without the negotiator having any interest of his own in the content of the contract. On the other hand, it was not negotiation where one of the parties entrusted to a subcontractor some of the clerical formalities related to the contract (see C & E Commrs v CSC Financial Services Ltd (Case C-235/00) [2002] BTC 5,141; [2001] ECR I-10237, para. 39).

The transactions exempted under art. 13(B)(d)(1) were defined in terms of the nature of the services provided and not in terms of the person supplying or receiving the service. That provision, in fact, made no reference to the person supplying or receiving the service. The same observation might be made as regards the nature of the relationship between the negotiator and the parties to the contract, since there was no reference to that subject in the wording of art. 13(B)(d)(1). In order to be regarded as exempt transactions for the purposes of art. 13(B)(d), the services provided must, viewed broadly, form a distinct whole, fulfilling in effect the specific and essential functions of the service of negotiation.

In the CSC case, the court held that negotiation was an act of mediation, which might consist, amongst other things, in pointing out to one of the parties to the contract suitable opportunities for the conclusion of such a contract, in making contact with another party or negotiating, in the name and on behalf of a client, the detail of the payments to be made by either side, the purpose of such an activity being to do all that was necessary in order for two parties to enter into a contract, without the negotiator having any interest of his own in the terms of that contract. It followed that the recognition of an activity of negotiation which was exempt for the purposes of art. 13(B)(d)(1) could not necessarily depend on the existence of a contractual link between the provider of the negotiation service and one of the parties to the credit agreement.

European Court of Justice (First Chamber).
Judgment delivered 21 June 2007.