Two firms sell to the same clients from two different countries and end up with margins that differ by several points, with no difference in pricing. The cause is VAT treatment: what is exempt, what is outside scope, and how much of the tax on their own costs each one can recover. It is a structuring question that gets decided by accident more often than by analysis.
What follows describes mechanisms. It is not tax advice, and VAT is a jurisdiction by jurisdiction subject where the same transaction can be treated differently in two member states of the same union. Take advice from a tax adviser in each place you are established.
Exempt does not mean free
The EU VAT system exempts a defined list of financial and insurance transactions, and national laws elsewhere often mirror it. The list covers things like transactions in currency, securities and other financial instruments, credit granting, and payment and transfer services, with the exact wording and its interpretation varying by state.
The consequence people miss is on the input side. When your output is exempt, you generally cannot recover the VAT charged on your costs. Zero rating and exemption look similar on an invoice and behave in opposite directions: a zero rated supplier charges nothing and recovers everything, an exempt supplier charges nothing and recovers nothing. For a trading firm whose cost base is technology licences, data feeds, cloud, marketing, legal and audit, all standard rated, the irrecoverable tax lands straight on the profit and loss.
Firms with a mix of exempt and taxable supplies fall into partial exemption, which means apportioning input tax by a method the tax authority accepts and recalculating annually. It is administratively heavy and it is where the money is, so it is worth getting the method agreed rather than assumed.
Where the exemption applies, and where it stops
The dividing line most relevant to this industry is between the financial transaction itself and the services that support it. Dealing in financial instruments generally sits within the exemption. Supplying software, hosting, data, marketing, introducing services or administration generally does not, even when the recipient is a regulated financial firm and even when the service is essential to the exempt activity.
This matters inside a group. If one company licenses the trading platform and CRM to the operating entity, that supply is technology, not finance, and it is treated accordingly. If the operating entity's own output is exempt, it may be unable to recover the VAT on that intragroup invoice, which turns a bookkeeping entry into a real cost. Some jurisdictions offer VAT grouping that removes intragroup supplies from scope, and the availability and conditions differ. This interacts directly with how the group holding structure is arranged.
Introducing brokers and affiliates sit in the same grey area. Whether a commission for introducing clients is exempt intermediation or a taxable marketing service has been litigated repeatedly, and the answer turns on what the intermediary actually does rather than what the contract calls it. Firms running introducer programmes across borders should have the treatment reviewed before the first payment, not after two years of invoices.
Nothing in this article is tax advice, and none of it should be applied to a live structure without a qualified adviser. VAT treatment depends on where each party is established, what is actually supplied, and how the local authority interprets the exemption.
Prop firm fees are the open question
The evaluation fee model does not fit the historic categories neatly, which is why treatment is inconsistent. A firm charging for access to a simulated trading evaluation is, on one reading, supplying a service delivered electronically. On another it is charging for entry to an assessment. It is not obviously a transaction in a financial instrument, since no instrument is traded on the client's account in the way the exemption contemplates. The wider regulatory position on these firms is set out in prop firm regulation, and the refundability question, covered in refundable challenge fees, adds another layer because a refundable fee can look like a deposit rather than consideration.
The practical exposure is on business to consumer sales into jurisdictions that tax electronically supplied services at the customer's location. A firm selling evaluations worldwide from one company may have registration obligations in places it has never thought about, and the liability accrues silently. This is one of the few areas where we tell founders to spend money on advice before the first thousand sales rather than after.
Cross border, and the reverse charge
For business to business supplies of services across borders, the general rule places the supply where the customer is established, and the customer accounts for the tax under the reverse charge. That is why a European software invoice to a business customer in another member state often carries no VAT and a note about the reverse charge. It does not make the transaction tax free, it moves the accounting to the recipient, and if the recipient's own output is exempt the reverse charge produces a real cost rather than a wash.
For business to consumer supplies the rules diverge by service type, with electronically supplied services commonly taxed where the consumer is. That means customer location evidence matters: the payment method's country, the billing address, the IP. Payment and billing systems have to capture and retain it, which turns a tax rule into a systems requirement, and it is worth checking that your billing stack records it before the first return is due.
The reason to settle this early is that VAT is charged on transactions already completed. A treatment corrected in year three applies backwards, and the firm cannot go back to clients to collect it.
"Founders celebrate the day someone tells them their revenue is VAT exempt. Then they find out they are paying VAT on every invoice they receive and reclaiming none of it."
— The SGHK Team
Key Takeaways
- Exemption blocks recovery of VAT on costs, so a technology heavy firm with exempt revenue absorbs the tax on its own invoices.
- Dealing in instruments tends to fall inside the exemption while software, data, hosting, marketing and administration generally do not.
- Intragroup technology charges can become a real cost when the receiving entity cannot recover input tax, which is a structuring decision.
- Prop firm evaluation fees do not map cleanly to the exemption, and consumer sales can create registration obligations by customer location.
Frequently Asked Questions
Is brokerage revenue exempt from VAT?
In the EU system, transactions in currency, securities and other financial instruments fall within a defined exemption, and many other jurisdictions mirror it. Whether a particular revenue line qualifies depends on what is actually supplied and how the local authority reads the exemption, so this needs a determination from a tax adviser rather than an assumption.
Why can an exempt firm not reclaim VAT on its software costs?
Because input tax recovery is generally tied to making taxable supplies. Exempt output does not carry that right, so the VAT charged by suppliers is a cost. Firms with both exempt and taxable revenue apportion recovery under a partial exemption method agreed with the authority.
How are prop firm evaluation fees treated for VAT?
There is no single settled answer. The fee is often analysed as an electronically supplied service rather than a financial transaction, which can create obligations based on where the customer is located. Because the treatment applies retrospectively once determined, this is a question to resolve with an adviser before scaling sales.
About SGHK
SGHK is a FinTech company that designs and builds its own software for the trading industry: the eTrader trading platform, Launch your Broker and Launch your Prop Firm. Every product is written, hosted and supported in-house and licensed to trading firms, with the CRMs branded to them, all hosted by us in the cloud, managed by each firm and built to scale across clustered servers as our clients grow. Everything is encrypted, and each firm is the only one with access to its data and its clients' data.