The Tax and Customs Administration of Malta has just issued an article aimed at offering clearer guidance regarding the application of the 12% reduced VAT rate on various supplies, with a specific focus on the provision of custody services for securities.
Effective from January 1st, 2024, a reduced VAT rate of 12% is applicable to securities portfolio management services, as outlined in the Fourth Schedule of the VAT Act. This rate remains valid notwithstanding any exemptions under item 3 of Part Two of the Fifth Schedule. Securities portfolio management involves ongoing monitoring and decision-making regarding a client’s investment portfolio, either on a discretionary or advisory basis. However, advisory services related to capital structure, corporate strategy, mergers, and similar matters are excluded from this reduced rate.
Regarding exemptions outlined in item 3 of Part Two of the Fifth Schedule, services strictly involving the reception, execution, and transmission of orders to buy and sell securities are exempt from VAT if charged on a transaction-by-transaction basis. If the service is billed as a combined percentage fee on assets under management including both portfolio management fees together with order execution charges, they are considered a single economic supply not eligible for the aforementioned exemption. Therefore, VAT at the reduced rate of 12% applies.
Moreover global custody package, excluding supervisory services, qualifies for exemption under item 3 of the Fifth Schedule to the VAT Act, provided it constitutes a single composite supply primarily consisting of exempt services. Determining the principal component of such a supply depends on factors like customer perspective, intentions, and the nature of the services provided.
Additionally, the article mentions nominee services where securities are held in one’s name on behalf of the beneficial owner which are exempt in terms of item 3 of Part Two of the Fifth Schedule providing exempt services like executing orders, negotiating payments, and ancillary services, the entire service package qualifies for exemption as long as these services form part of a single composite supply.