Credit management exemption limited to current lender
Credit management exemption limited to current lender
The CJEU rules that post-transfer credit management is no longer VAT-exempt. What does this mean for banks, SPVs and your structure? Discover the impact.
A taxpayer (A Oy) is a bank in Finland. A Oy grants credit for the financing of housing.
After the credit has been granted, a large proportion of the credit is sold onward to B Oy (a special purpose vehicle (“SPV”) and wholly-owned subsidiary of A Oy focused on securitisation of loans), for conversion into negotiable bonds. Despite full legal and economic transfer, the management of the credit remains with A Oy after the transfer.
A Oy sought an advance tax ruling from the Finnish Central Tax Board to confirm the VAT treatment of both the sale of the credit and the subsequent management of the credit. The initial ruling by the Finnish Central Tax Board was that both supplies were exempt from VAT under the credit exemption. However, this was challenged by the Tax Recipients’ Legal Services Unit, as after the sale A Oy was no longer the person granting the credit. The Finnish Supreme Administrative Court referred the case to the CJEU.
Judgement of the General Court
The General Court has followed the opinion of the Advocate General: the credit management services provided by A Oy to B Oy after the sale of the credit do not fall under the VAT exemption for credit.
The Court noted that the wording of the Directive did not provide clarity on who the person(s) benefiting from the exemption would be, and that the term ‘the person granting it’ varied between language versions. However, as a general principle of EU law, exemptions are to be interpreted strictly.
The Court took a purposive approach to reviewing the exemption, stating that in this situation there was neither difficulty in determining the taxable amount nor an increase in the cost of consumer credit. As a result, the services provided by A Oy to B Oy did not fall within the intention of the credit exemption and were therefore subject to VAT.
The General Court agreed with A-G Brkan’s position that the management of credit also did not fall under the exemption for credit guarantees, nor transactions concerning payments or debts. As a result, the credit management services provided by the original lender after sale of the credit for securitisation should be subject to VAT.
The Court did not follow up on A-G Brkan’s position that VAT exemption was not applicable on the sale of credit by A Oy to B Oy, as this question was not referred to the General Court.
It may be possible to mitigate the effects by re-structuring the loan securitisation operations within the group, but this should be looked at holistically.
Background – case summary
FactsA taxpayer (A Oy) is a bank in Finland. A Oy grants credit for the financing of housing.
After the credit has been granted, a large proportion of the credit is sold onward to B Oy (a special purpose vehicle (“SPV”) and wholly-owned subsidiary of A Oy focused on securitisation of loans), for conversion into negotiable bonds. Despite full legal and economic transfer, the management of the credit remains with A Oy after the transfer.
A Oy sought an advance tax ruling from the Finnish Central Tax Board to confirm the VAT treatment of both the sale of the credit and the subsequent management of the credit. The initial ruling by the Finnish Central Tax Board was that both supplies were exempt from VAT under the credit exemption. However, this was challenged by the Tax Recipients’ Legal Services Unit, as after the sale A Oy was no longer the person granting the credit. The Finnish Supreme Administrative Court referred the case to the CJEU.
Judgement of the General Court
The General Court has followed the opinion of the Advocate General: the credit management services provided by A Oy to B Oy after the sale of the credit do not fall under the VAT exemption for credit.
The Court noted that the wording of the Directive did not provide clarity on who the person(s) benefiting from the exemption would be, and that the term ‘the person granting it’ varied between language versions. However, as a general principle of EU law, exemptions are to be interpreted strictly.
The Court took a purposive approach to reviewing the exemption, stating that in this situation there was neither difficulty in determining the taxable amount nor an increase in the cost of consumer credit. As a result, the services provided by A Oy to B Oy did not fall within the intention of the credit exemption and were therefore subject to VAT.
The General Court agreed with A-G Brkan’s position that the management of credit also did not fall under the exemption for credit guarantees, nor transactions concerning payments or debts. As a result, the credit management services provided by the original lender after sale of the credit for securitisation should be subject to VAT.
The Court did not follow up on A-G Brkan’s position that VAT exemption was not applicable on the sale of credit by A Oy to B Oy, as this question was not referred to the General Court.
Practical consequences
The position taken by the General Court does not match the current VAT treatment of credit management services in the Netherlands and a number of other EU countries. The decision that the credit management services provided by the original lender are subject to VAT will have a significant impact on banks, SPVs active in securitisation and other participants in the credit market, as many taxpayers have limited or no right to deduct VAT.It may be possible to mitigate the effects by re-structuring the loan securitisation operations within the group, but this should be looked at holistically.
