Both invoice and trade factoring are subject to VAT
Both invoice and trade factoring are subject to VAT
On 23 October 2025, the CJEU confirmed in the Kosmiro judgement that for both invoice and trade factoring, there is one indivisible service (debt collection) that is subject to VAT. This judgement could have major impact on factors treating their commission as a VAT-exempt supply of credit, as well as increasing the cost of factoring for (partially) exempt businesses.
Two types of factoring services are provided:
This will result in a beneficial VAT position for many factors. Invoice and trade factors will be able to recover the VAT incurred on associated costs, resulting in an increase in the pro rata recovery rate, or potentially becoming a fully taxable business. Typically, their clients will be fully taxable businesses who can recover the VAT they are charged
However, for healthcare providers or other (partially) exempt businesses, this change will increase the total cost of factoring as the VAT charged by the factor will be (partly) irrecoverable. For invoice or trade factors who treat the “factoring commission” as an exempt supply of credit, there is a risk that VAT is being undercharged to factoring customers.
Please note, there are many different types of factoring not covered by this judgment and where the fact pattern differs and it remains important to assess on a case-by-case basis.
Background – case summary
A Finnish company (“A Oy”) provides factoring services to businesses.Two types of factoring services are provided:
- invoice factoring: financing secured against invoices, with the client retaining the risk of default; and
- trade factoring services: purchase of the invoices by the factor from the client, with the risk of default transferred to the factor.
- a factoring commission: a percentage of the invoice, depending on the risk profile of clients and the payment term. This was paid in advance.
- an ‘arrangement fee’ which covers various other expenses including set-up, anti-money laundering checks etc.
According to the CJEU, both the factoring fee and the arrangement fee constitute the consideration in return for the services provided by the factor. The Court emphasised that the commission and fees do not represent a reduction in the purchase price of the receivables. For both forms of factoring, the CJEU confirmed that there was one indivisible service subject to VAT.
The CJEU’s rationale differed for each type of factoring:
- for trade factoring, the factor buys the debts outright and therefore takes on the risk of default. There can be no granting of credit under Article 135(1)b of the VAT Directive.
- for invoice factoring, there is a provision of credit, but this is ancillary to the provision of debt collection and does not constitute a separate supply of credit which would be exempted from VAT.
Practical consequences
This CJEU judgment clarifies the position for factors and confirms that invoice and trade factoring services (including all associated fees) are one indivisible supply, subject to VAT. The scope of the debt collection carve-out therefore has a widened scope.This will result in a beneficial VAT position for many factors. Invoice and trade factors will be able to recover the VAT incurred on associated costs, resulting in an increase in the pro rata recovery rate, or potentially becoming a fully taxable business. Typically, their clients will be fully taxable businesses who can recover the VAT they are charged
However, for healthcare providers or other (partially) exempt businesses, this change will increase the total cost of factoring as the VAT charged by the factor will be (partly) irrecoverable. For invoice or trade factors who treat the “factoring commission” as an exempt supply of credit, there is a risk that VAT is being undercharged to factoring customers.
Please note, there are many different types of factoring not covered by this judgment and where the fact pattern differs and it remains important to assess on a case-by-case basis.
