Factoring with collection as partial loan

Facts

The Finnish company A Oy provides factoring services in relation to invoiced, undisputed receivables which become due in the future in two forms. In both forms, A Oy receives various fees and commissions from its customers, including a so-called financing commission payable in advance amounting to a percentage of the receivable. This commission is higher the lower the credit rating of the customer and the debtor of the receivable and the longer the payment term for the invoices is. In addition, A Oy charges a so-called set-up fee and various other costs and fees.

In option 1, the customer "pledges" the receivable and A Oy, as the factor, grants the customer a loan in the amount of the receivable, up to a maximum amount based on the risk. A Oy takes over the reminders and the out-of-court collection of the receivable. The risk of the receivable being uncollectible (the del credere) remains with the customer.

In option 2, A Oy "purchases" the claim up to a maximum amount, which is again based on the risk. The customer assigns the claim to A Oy, which also assumes the del credere.

A Oy is of the opinion that the financing commission and the other costs and fees are subject to VAT in their entirety.

Questions referred and ECJ decision

Factoring variants as a service for consideration

The referring Finnish court first wanted to know whether, in the case of factoring through the sale of receivables, the financing commission and the set-up fee constituted consideration for a taxable service provided by A Oy.

In accordance with the ECJ decision in the MKG-Kraftfahrzeuge-Factoring case, judgment of 26 June 2023, C 305/01, the ECJ also considers factoring through the purchase of receivables in the present case to be a service for consideration, which consists in relieving the customer of the collection and risk of irrecoverability. The consideration is the difference between the nominal value of the receivable and the amount paid by the factor for the receivable. According to the ECJ judgment of 27 October 2011, C 93/10, GFKL Financial Services, something else may apply in the case of non-performing receivables. However, since the receivables were not yet due in the present case, a payment default could not be assumed.

The financing commission did not amount to an adjustment of the purchase price of the receivable to its actual economic value, but was consideration for the collection of the receivable. The set-up fee was a lump sum for setting up the factoring mechanism, which covered, among other things, the cost of complying with money laundering regulations. It was therefore consideration for this establishment and initiation of the service provided by the factor.

Uniform collection or partial granting of a loan

In addition, the referring court asked for clarification whether there was a uniform service of debt collection or whether, in addition, the granting of a loan was to be assumed. The question was relevant because Article 135 (1) (d) of the VAT Directive exempts the granting of a loan from VAT, but not the collection of debts. The court considered the granting of a loan to be conceivable, among other things because the amount of the financing commission depends on the length of the payment period and the risk assumed by A Oy.

The ECJ ruled that the VAT exemption under Article 135 (1) (d) of the VAT Directive must be interpreted narrowly as an exception to the principle of tax liability. However, the concept of debt collection requires a broad interpretation as an exception to the exception. It therefore covers all forms of factoring, regardless of their modalities. This means that both factoring through the sale of receivables and factoring through pledging are covered by Article 135 (1) (d) of the VAT Directive as debt collection.

From the perspective of both the customer and the factor, this constitutes a single economic transaction, the main purpose of which is to enable the customer to transfer the collection and recovery of its receivables to a third party. A division of the transaction would be unrealistic. The service provided by A Oy in the present case is therefore a single and indivisible service of debt collection, which is subject to VAT. It does not include any independent financing service. It is true that A Oy provides its customers with funds through factoring by way of pledge and receives the receivables as security. However, since A Oy also takes over the collection and recovery of the receivables, which is the main purpose of factoring, this does not give rise to a different assessment.

Direct applicability of Article 135 (1) (d) of the VAT Directive

Since Finnish law (unlike German law) does not exclude the collection of receivables from the tax exemption for transactions involving receivables, the referring Finnish court wanted to know whether taxable persons could directly invoke Article 135 (1) (d) of the VAT Directive in this respect. The ECJ answered in the affirmative because the exception to tax exemption is precise and unconditional and Member States have no discretion in this regard.

Classification

Both the Federal Fiscal Court (BFH) and the German tax authorities have adopted the ECJ ruling in the MKG-Kraftfahrzeuge-Factoring case. Regarding to the granting of a loan by the factor in connection with the factoring service, the Federal Ministry of Finance (BMF) and the BFH assume that this is generally of secondary importance and, as a dependent ancillary service, shares the fate of the main service. This view corresponds with the ECJ's ruling. The BMF assumes that the granting of a loan can also be an independent main service if it has independent economic significance. This is particularly likely to be the case if the claim is due in several instalments or in total before the end of one year after the transfer, or if the requirements of section 3.11 (1) UStAE (administrative guidelines to the German VAT Code) are met, which provides guidance on the distinction between several independent and uniform overall services (section 2.4 (4) sentences 5 and 6 UStAE). However, such circumstances cannot be inferred from the judgment in the A Oy case. 

The question of the applicability of Article 135 (1) (d) of the VAT Directive is irrelevant for Germany, as Section 4 (8) (c) of the UStG (German VAT Code) expressly excludes the collection of claims from the VAT exemption.

Author: Nadia Schulte