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Exclusions and exemptions to PSD2: limited networks and low transaction value

Francesc Cholvi, associate at Garrigues Corporate Law Department.

Although the current payment services regulations seek to harmonize and modernize payment systems throughout Europe, tighten the rules on certain activities and regulate new services, these also include a number of exclusions and exemptions to the supervision and authorization requirements, based on the features of each payment service provider’s business and the instruments used. This is the case of the limited network exclusion and the exemption based on transaction values. These special cases allow for a more lax framework depending on the activity, size and value of transactions, while still maintaining adequate protection for payment service users.

As a result of the harmonization and modernization of payment systems throughout Europe, achieved by means of the implementation of Directive (EU) 2015/2366 on payment services in the internal market (also known as Payment Services Directive 2, or PSD2), which was partially transposed into Spanish legislation by Royal Decree-law 18/2018 on payment services and other urgent financial measures (or by its Spanish acronym, the RDLSP), a modern legal framework that guarantees that all payment systems can be used under the same conditions in order to safeguard the consumer’s right to choose a system and to ensure adequate protection of consumers has been instituted. This regulation was further developed by Royal Decree 736/2019, of December 20, 2019, on the legal regime for payment services and payment institutions.

One of the key features of the new legislation is the greater clarity given to two exemptions or exclusions established in the first European payment service rules: the limited network exclusion and the exemption for transaction value.

Exclusion for payment activities within a limited network

Firstly, it must be pointed out that the first European Payment Services Directive already included the exclusion for payment instruments that can only be used to acquire goods or services in the premises of the issuer or within a limited network of service providers or for a limited range of goods or services, and therefore such instruments were not subject to the rules for the authorization of payment institutions.

However, it was noted that certain payment activities covered by the limited network exclusion often comprised significant payment volumes and values, which led to a lack of legal protection for users of those payment service users. In order to aid limiting the risk posed by this lack of consumer protection, the current legislation aims to preclude the use of the same instrument to acquire an unlimited range of goods and services or to acquire goods and services within more than one limited network.

In that regard, a payment instrument is considered to be used within a limited network and, therefore, the requirement to apply for the authorization from the Bank of Spain as a payment institution would not apply if solely  it can be used only in the following circumstances:

  1. For the purchase of goods and services in a specific retailer or specific retail chain;
  2. For the purchase of a very limited range of goods or services;
  3. Where the payment instrument is valid only in national territory, provided at the request of an undertaking or a public sector entity and regulated by a public authority for specific corporate or tax purposes to acquire specific goods or services from suppliers having signed a commercial agreement with the issuer.

Nevertheless, it is important to note that if a specific-purpose instrument develops into a general-purpose instrument, the exclusion would no longer apply. Along the same lines, the exclusion would also cease to apply to any instrument used to conduct transactions within more than one limited network.

This exclusion also applies to those payment instruments that can be used for purchases in stores of listed merchants, understood to be those service providers forming part of the same limited network under a commercial agreement with a professional issuer.

Accordingly, natural or legal persons that render such services may do so without seeking authorization or registration.

Furthermore, Spanish legislation requires goods and services suppliers forming part of a limited network to sign a contract directly with the professional issuer, in which they recognize the obligations they all share when accepting the specific payment instrument as well as users’ rights which, in all cases, must be identical, irrespective of the supplier of the good or service.

Notwithstanding the above, the RDLSP lays out certain reporting obligations when the amount of the services exceeds a given threshold and, in particular, when: (i) one or both of the services indicated in points (1) and (2) above are being rendered; and (ii) the average monthly value of their payment transactions in the preceding 12 months is above €1 million. If these conditions are met, such payment service providers must send the Bank of Spain an annual notification containing a description of the services offered and specifying under which of the two exclusions the activity is considered to be carried out. The Bank of Spain will review the notice and may make a duly motivated decision if it considers that the activity does not meet the criteria to exclude the application of the payment services regulations.

Exemption for transaction value

Secondly, and without prejudice to the exemptions to the applicable regulations, the law provides for another exemption known as the exemption for transaction value. The latter may be considered a hybrid exemption between the obligation to seek authorization prior to rendering payment services and the complete limited network exclusion as set out above above.

However, in cases where a provider is not subject to the obligation to apply for the authorization of the Bank of Spain prior to commencing its activity, other specific notification rules are put in place so that payment service users receive sufficient, understandable and pertinent information on the service.

Accordingly, payment service providers that do not exceed the following thresholds will be exempt from having to apply for said Bank of Spain authorization, although they should request prior entry and verification in the Bank of Spain’s special register, provided that:

  1. the monthly average of the preceding 12 months’ total value of payment transactions executed, including any agent, does not exceed €3,000,000, except in the case of providers rendering payment initiation and/or account information services; and
  2. none of the natural persons responsible for the management or operation of the business has been convicted of offenses relating to money laundering or terrorist financing or other financial crimes.

Furthermore, providers benefiting from the exemption must establish their head office in Spain, will be treated as a payment institution but will not be able to exercise the rights of establishment and freedom to provide services in the European Union, and must report any change in their transaction value that would render the exemption non-applicable, in which case it would have to apply for the corresponding authorization from the Bank of Spain within 30 calendar days.

Tax implications

The payment instruments covered by the limited network exclusion, expressly include meal vouchers, restaurant or similar cards, membership cards, public transport cards and similar payment instruments, which are sometimes subject to a specific tax or labor legal framework. Here it is important to bear in mind the distinction made, for VAT purposes, between single-purpose vouchers (where the tax due on the goods or services for which the voucher is exchanged is known and where the sale of these vouchers represents the VAT chargeable event as if it were the sale of the actual good or service) and multi-purpose vouchers (where the tax due on the exchange for goods or services is not known and, therefore, the chargeable event does not occur upon issue and distribution of the voucher but rather when the voucher is actually exchanged).