Financial services are VAT exempt. Except when they aren’t
Article 135(1)(b) to (g) of the VAT Directive exempts credit, guarantees, payments and transfers, dealings in securities, and the management of special investment funds. In Malta, this is transposed through the Fifth Schedule to the VAT Act (Cap. 406).
On paper, the exemption is broad. In practice, the CJEU has held for years that exemptions must be interpreted strictly. It has also held that the line between an exempt financial service and a taxable supply depends on what the service does, not on what it is called or who supplies it.
Some of the decisions that shape the boundary:
SDC (C-2/95) and CSC Financial Services (C-235/00): an outsourced service is exempt only if it forms a distinct whole that has the effect of a financial transaction. Technical, administrative or marketing support does not qualify.
Axa UK (C-175/09): payment collection services can fall within the debt collection carve-out and be taxable.
Deutsche Bank (C-44/11): discretionary portfolio management is a single taxable supply, not a bundle of exempt securities transactions.
ATP PensionService (C-464/12) and Fiscale Eenheid X (C-595/13): the fund management exemption is limited to funds comparable to UCITS, and to services that are specific and essential to managing them.
Bookit (C-607/14), NEC (C-130/15) and DPAS (C-5/17): card handling and payment facilitation services that do not themselves effect a transfer of funds are taxable.
DNB Banka (C-326/15) and Aviva (C-605/15): the cost-sharing exemption is not available to the financial and insurance sectors.
The trend continues:
Kosmiro (C-232/24), October 2025: both trade and invoice factoring fees were held to be taxable debt collection services.
T-184/25, June 2026: loan servicing performed by the original lender after the loans have been sold falls outside every limb of Article 135(1)(b) to (d). This is relevant to securitisation and NPL structures.
Why this matters:
If a service is treated as exempt when it is not, output VAT is under-declared and interest and penalties follow. If it is wrongly treated as exempt on the input side, recoverable VAT is lost. A wrong classification also distorts the partial attribution ratio. Services bought in from abroad bring the reverse charge into play, which banks, fund managers, payment institutions and fintechs frequently overlook.
Many of these positions were set years ago and have not been revisited since the case law moved on.
Quazar offers a VAT health check for financial services businesses. It covers:
a review of each revenue stream against current CJEU case law
input VAT recovery and the partial attribution method
reverse charge exposure on imported services
contract wording and invoicing
If you would like to discuss how this applies to your business, get in touch.
Get in Touch:
Josef Mercieca
jmercieca@quazar.mt / +356 2388 4600
