Credit management exemption narrowed in A-G opinion
Credit management exemption narrowed in A-G opinion
The VAT treatment of creditrelated services continues to be a key area of focus for the financial sector, particularly in the context of securitisation structures. A recent Finnish case referred to the Court of Justice of the European Union (CJEU) addresses the scope of the VAT exemption for credit management services following the transfer of loans. The Opinion of Advocate General Brkan raises important questions as to whether such services can remain exempt once the original lender is no longer the holder of the credit, potentially impacting established market practice across several EU Member States.
After the credit has been granted, a large proportion of the credit is sold onward to B Oy (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.
A-G Brkan continued to state 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.
A-G Brkan also questioned whether the VAT exemption was applicable on the sale of credit by A Oy to B Oy, but as this question was not referred to the CJEU, no further opinion was issued.
If the CJEU does follow the A-G’s opinion, this case would 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.
Facts and background of the case
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 (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.
Advocate General Brkan’s Opinion
The Advocate General (A-G) determined that the credit management services provided by A Oy to B Oy would not fall under the VAT exemption for credit. In A-G Brkan’s opinion, this was because including the original lender within the scope of the credit management exemption would extend the scope of the exemption. The exemption would be extended beyond the intention of the general principles of VAT, and in particular the minimisation of tax avoidance and abuse. A-G Brkan therefore opined that the credit management exemption should only be applicable for the current lender, rather than the original lender (in this case, A Oy).A-G Brkan continued to state 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.
A-G Brkan also questioned whether the VAT exemption was applicable on the sale of credit by A Oy to B Oy, but as this question was not referred to the CJEU, no further opinion was issued.
Practical consequences
It should be noted that this is only an Advocate General opinion and therefore the opinion may not be followed by the Court of Justice. The position taken by A-G Brkan does not match the current VAT treatment in the Netherlands and a number of other EU countries.If the CJEU does follow the A-G’s opinion, this case would 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.
