VAT Treatment of Payment Services in Malta Provided by Payment Service Providers (PSPs)

In this article, we will examine the VAT treatment of these services, the criteria for VAT exemption, and discuss related taxable supplies.

What is the nature of a payment processing service?

Payment processing services include a variety of services offered by PSPs to enable electronic payment transactions. A detailed definition of payment services is provided under Annex I of Directive (EU) 2015/2366 (the Payment Services Directive). These services often involve the transfer of funds from one party to another, typically facilitated via credit card transactions, bank transfers, or digital wallets.

Examples include:

• Services enabling cash to be placed on a payment account 
• Services enabling cash withdrawals from a payment account
• Credit card payment processing
• Direct debit services
• Online payment gateway services
• Money transfer services

These services form the backbone of the financial infrastructure, enabling seamless payments for businesses and consumers.

Criteria for the application of the VAT exemption to payment processing services

According to the EU VAT Directive, in particular Article 135 (1), certain financial services are exempt from VAT, and payment processing services would fall under this exemption if they meet specific criteria. In Malta’s case, one would need to look at the provisions of Item 3, Part Two of the Fifth Schedule to the Value Added Tax Act, Chapter 406 of the Laws of Malta.

Exempt services:

• Intermediary Services: When PSPs act as intermediaries for payments, i.e., they help facilitate the transfer of funds without taking ownership or control of the funds (i.e. between a merchant and end-user).
• Services closely related to financial services: Payment services related to the transfer of funds, like credit transfers or payment transactions, can be exempt.
• Services must directly relate to the provision of payment transactions or activities considered necessary for payment transfer.

Key conditions for the VAT exemption to apply:

• The service is directly related to the transfer of money or funds.
• There is no ownership of the funds by the PSP, however, it is directly involved in debiting or crediting the bank account of the involved parties.
• The service provided is an essential step in the payment transaction process.

 

EU Legal Precedents

The Court of Justice of the European Union (CJEU) has clarified that the key factor in determining VAT exemption is whether the payment processing service is an integral part of a payment transaction or if it constitutes a financial service exempted under the VAT law. 

The Court has stressed in a number of cases that a transfer is a transaction consisting of the execution of an order for the transfer of a sum of money from one bank account to another. It is characterised in particular by the fact that it involves a change in the legal and financial situation existing, on the one hand, between the person giving the order and the recipient and, on the other, between those parties and their respective banks; and, in some cases, between those banks.

Moreover, the transaction which produces the change is solely the transfer of funds between accounts, irrespective of its cause. Thus, a transfer being only a means of transmitting funds, the functional aspects are decisive for the purpose of determining whether a transaction constitutes a transfer within the meaning of Article 135(1)(d) of the VAT Directive.

Further, the wording of Article 135(1)(d) of the VAT Directive does not in principle preclude a transfer from being broken down into separate services which then constitute ‘transactions concerning’ transfers within the meaning of that provision. While it is not inconceivable that the exemption at issue may extend to services which are not transfers per se, the fact remains that that exemption can relate only to transactions which form a distinct whole, fulfilling in effect the specific, essential functions of such transfers.

Services provided by PSPs that are not exempt from VAT (taxable supplies)

In practice, PSPs provide a wide range of services, including but not limited to processing of payments. Some of those other services provided by PSPs do not qualify for the VAT exemption and may be treated as taxable supplies. These services could grant the provider the right to input VAT deduction and therefore could impact its overall VAT position.

Examples of Taxable Services:

• Advisory or Consultancy services: If a PSP provides financial advice, consultancy on payment systems, or tailored solutions for businesses, such services are typically taxable.
• Fees for hosting or licensing of payment platforms: Charges for the use of a PSP’s software platform or infrastructure that are not directly related to payment processing but are more in the nature of providing access to a service or asset.
• Services related to payment systems but not a direct part of the payment: For example, services such as fraud detection or data analytics provided by PSPs may be taxable as they are not integral to the payment transaction itself.

 

VAT treatment of taxable services

• These services are subject to the standard VAT rate when the place of supply is in Malta.
• PSPs providing taxable services are allowed to recover input VAT on costs incurred in relation to these supplies.
• PSPs providing mixed supplies for VAT purposes (taxable and exempt without credit supplies) would need to apply the Partial Attribution Rules, determined by Item 5 (3) of the Tenth Schedule to the VAT Act, to establish the right of deduction of input VAT on receipt of supplies considered as general overheads.

Conclusion

Nature of payment processing services: Facilitate electronic transactions (e.g., credit card processing, money transfers).

VAT exemption: Payment services directly related to the transfer of funds are generally VAT-exempt.

Criteria for the VAT exemption:

• Services must facilitate the actual transfer of funds.
• The PSP does not take ownership of the funds.
• Services are directly related to and essential for the financial transaction process.

PSPs also provide taxable services:

• Advisory, consultancy, or non-financial services are taxable.
• Services like fraud detection, analytics, and platform subscriptions may also be taxable.

Taxable services allow for input VAT deduction: PSPs providing taxable services can recover input VAT on expenses, subject to the satisfaction of further conditions.
 

How can BDO Malta we help?

The importance of continuous monitoring of the VAT position and compliance obligations of taxable persons has significantly increased over the years. As part of our range of advisory services, we often perform VAT health checks on external clients along with ongoing analysis of the VAT treatment of the operations of our existing clients. Get in touch with our team to discuss the challenges that your business is facing and the opportunities ahead.


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