Court of Justice Ruling on the Application of VAT to Factoring Fees

The dispute concerned fees charged by the Finnish company A Oy (hereinafter as ‘the Company’) in connection with the provision of two different types of factoring services – trade factoring in the form of the purchase of receivables and invoice-factoring, where the financing is only secured by receivables and their ownership does not pass to the Company. It is important to note that the case in question concerned only undisputed receivables before their due date.

The Company charged its customers various fees, with the referring court focusing on the two most significant ones, namely the commission for providing financing (hereinafter as ‘the Commission’), the amount of which was indirectly proportional to the customer's credit rating and corresponded to a percentage of each receivable, and a flat-rate set-up fee (hereinafter as ‘the Fee’), covering the costs of administration and ensuring compliance with the legal conditions for enforcement. 

The Finnish tax authorities took the view that both the Commission and the Fee constituted, at least in part, consideration for the provision of credit, i.e. a financial service exempt from VAT. The Company disagreed and argued that all fees are related to the management and collection of receivables and were therefore subject to VAT as a whole. 

The Court of Justice first reiterated that the concept of debt collection must be interpreted broadly and therefore necessarily covers all types of factoring. There is no reason why trade factoring and invoice factoring should be treated differently, since in both cases it is the factor who ensures the management and collection of receivables, and the main nature of the service is debt collection. 

Furthermore, the Court of Justice rejected the argument of Finnish tax authorities that all financing mechanisms must be treated equally and stated that it is necessary to distinguish between debt collection services and credit services for tax purposes, as this was the intention of the legislator. 

The Court of Justice concluded that both trade and invoice factoring constitute, in this case, a single and indivisible supply consisting in the provision of a debt collection service, which is subject to VAT. In other words, both the Commission and the Fee are consideration for this service and, in this case, could not be considered, even in part, as interest on the financing provided, which would be exempt from VAT.

Factoring is a very popular financial instrument for operational financing, which is associated with various fees, some of which could be classified as remuneration for debt collection (subject to taxation) and others as remuneration for financing (subject to exemption). There is no doubt that the Kosmiro decision fundamentally changes established practice, and we therefore strongly recommend that you assess the correct application of VAT to your factoring agreements, whether you are a provider or recipient of these services.

Authors:

Štěpánka Šťastná, Tax Department Manager

Hana Slavíková, Junior Consultant, Tax Department