PSPs often bundle everything into one VAT exempt fee. Can that position still be defended?

A case study on VAT and payment services

You charge your merchants a single fee. You issue a single invoice. You mark it exempt. But when a tax authority looks inside that fee, it may see more than one service. And that might change everything.

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Meet PayMT Co

PayMT Co is a Malta-registered licensed payment institution acting as a merchant acquirer. It offers merchants an integrated payment solution: one contract, one fee (2.9% + €0.25 per transaction), one invoice line marked "exempt".

Included in that single fee, the merchant gets:

• Card payment processing capabilities
• Fraud screening and risk assessment on every transaction
• A merchant dashboard with real-time analytics and reporting

PayMT Co accepts and manages card payment transactions for its merchants through a single platform. A flagship customer is a Malta-based online retailer processing around €5 million a month through the platform.

PayMT Co treats the entire fee as VAT-exempt under Article 135(1)(d) of the VAT Directive (transactions concerning payments and transfers), as implemented in Malta by the Fifth Schedule to the VAT Act.

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The question nobody asked

Is the whole fee really exempt? Or are there elements inside that bundle that should carry VAT?

This is where the concept of single and composite supplies comes in. Under EU VAT law, when you bundle several services into one package, you must decide whether you are making one supply (taxed as a whole) or several distinct supplies (each taxed on its own merits).

The CJEU set the test in Card Protection Plan (C-349/96): elements form a single supply where, objectively, they are so closely linked that splitting them would be artificial. The assessment is made from the perspective of the typical customer, and the fact that a single price is charged is not decisive.

On the other hand, an element is ancillary if it is not an aim in itself for the customer, but a means of better enjoying the principal service.

Let's walk through each element.

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Card payment processing: the main event

This is why the merchant signed up. The main purpose of the service is to let the merchant accept card payments and receive the proceeds efficiently and securely. The payment processing element is therefore central to the whole arrangement.

Whether a merchant acquirer's services qualify for the exemption ultimately depends on the precise facts and the role it plays in the payment chain. The CJEU's decisions in SDC (C-2/95) and Bookit (C-607/14) show that the service must have the effect of transferring funds and changing the legal and financial situation of the parties, and that a purely technical service does not qualify. Labels alone cannot decide the question. PSP business models and contracts vary widely, so the exemption must be assessed case by case.

For this example, we assume that PayMT Co's role in the payment chain meets the CJEU's criteria. As an acquirer, it takes on the obligation to pay the merchant and carries the risk of chargebacks and of the merchant failing. On that basis, the payment processing element falls within the exemption.

But the analysis does not stop there. PayMT Co's fee also covers fraud screening, risk assessment and reporting tools. How should those extra elements be treated for VAT purposes?

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Fraud screening: along for the ride

Merchants do not generally buy fraud screening for its own sake. They need it because they accept card payments. It is built into the transaction flow, runs automatically, and generally has little commercial purpose outside the payment context.

Under the Card Protection Plan test, there is a strong case for treating this element as ancillary: it is a means of better enjoying the principal service. Fraud monitoring is, in any event, part of the acquirer's own core responsibilities. It should therefore follow the exempt treatment of the payment service, although the position may differ if it is offered as an optional, separately priced service.

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The dashboard: where it gets interesting

Real-time analytics. Transaction reporting. Possibly customer segmentation, conversion insights and predictive tools.

This is where the single supply analysis comes under pressure, because some analytical tools may deliver value beyond the core payment service. A merchant could buy a separate analytics product from another provider. Reporting and dashboard fees typically point to an informational rather than a payment role. If PayMT Co's dashboard goes beyond basic settlement reporting and delivers real business insight, it may have independent commercial value for the merchant and could be a distinct, taxable supply.

The CJEU has been clear: where an element has independent value for the customer, rather than simply supporting the main service, bundling it into one contract and one fee does not automatically make it part of the principal supply. The economic reality governs, not the invoicing.

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The real question behind the bundle

PayMT Co's payment processing element appears to have a strong basis for exemption. But does that exemption automatically extend to everything else included in the fee?

If the additional features are ancillary to the payment service and merely support its use, the whole fee may be treated as a single exempt supply. Where certain elements have distinct value in their own right, however, the tax authority may separate them out and require part of the consideration to be allocated to a taxable supply. For a Maltese merchant, that portion would attract Maltese VAT on PayMT Co's invoice.

So where does PayMT Co's dashboard fit into that analysis?

The answer is rarely decided by labels alone. When payment services are supplied together with additional features, the focus moves to the overall economic reality of the arrangement rather than the way it is invoiced.

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What this means for you

If you are a PSP treating your entire fee as exempt, here is our honest assessment.

The VAT analysis has become more nuanced as PSP offerings evolve beyond traditional payment processing. The exemption is interpreted strictly, and only services that change the legal and financial situation of the parties qualify. Bundled PSP offerings therefore remain a common VAT pitfall across the EU.

Taxation might be a good thing. Exempt supplies restrict input VAT recovery. Where part of the fee is correctly treated as taxable, input VAT on costs attributable to that part becomes deductible. Costs shared between exempt and taxable supplies are recovered only in proportion. For technology-heavy PSPs investing in platform development, that difference can be material.

The facts drive the answer. In this example, the dashboard shows how non-traditional service elements can affect both VAT liabilities and VAT recovery. Several factors can influence the outcome: how the services are described in the contract, whether the dashboard could be sold on its own, how the price can be allocated, and how your marketing presents the offering to the customer.

Periodic review remains essential. A proactive review usually costs far less than defending a retrospective assessment with interest and penalties. The question is not whether this analysis applies to you, but whether it has been carried out and still reflects the commercial reality of your business.

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One thought to carry forward - A single fee does not guarantee a single VAT answer. The sooner you look inside your own bundle, the fewer surprises arrive from outside it.