General Court on exemption for loan administration

Facts of the case

A Oy, a bank, granted property loans. As a rule, it sold these to its subsidiary B at market price immediately after granting them. Even after the loans had been transferred to B, A continued to manage them; in other words, A dealt with all questions arising between the borrowers and B for the remainder of the loan term. The fee for the administration services was based on the actual costs plus a mark-up.

A was financed, amongst other things, by means of covered bonds. Most of the loans sold to B served, at least at some point during their term, as security for these bonds.

General Court decision

In accordance with the questions referred for a preliminary ruling, the General Court examined the potential VAT exemption of A’s loan management services under Article 135(1)(a) to (d) of the VAT Directive (financial services).

Article 135(1)(b) of the VAT Directive – Management of loans

Article 135(1)(b) of the VAT Directive exempts, amongst other things, the management of credit by the person granting it from VAT. The issue was the interpretation of the phrase “by the person granting it”, i. e. whether the VAT exemption applies only to the financial institution that is currently the lender (that would be B), or also to the party that originally granted the loan, i.e. A. In some language versions of the VAT Directive, the wording can be translated as ‘the party that granted this loan’. This could be interpreted to mean that the original lender is entitled to the VAT exemption. Other language versions tended to suggest that the current lender was the beneficiary. Still other language versions, such as the German one, allow for both interpretations. 

The General Court then argues that Article 135(1)(b) of the VAT Directive, like any VAT exemption, must in principle be interpreted strictly. It further follows from the provision that there must be a link between the granting of the loan and its administration, which suggests that both services must be provided by the same person. Furthermore, the purpose of the tax exemption must be taken into account. This consists in removing the difficulties associated with determining the taxable amount and the amount of deductible input VAT. However, these difficulties do not arise where the granting and administration of credit are carried out by two different persons. The tax exemption for administration is also intended to prevent consumer credit from becoming more expensive. In the present case, however, it cannot be assumed that the costs of administration are automatically passed on to the borrowers. Furthermore, the administration of loans may be carried out by any person other than the current lender. There is no apparent reason to exempt from VAT the administrative services provided by a person who was previously the lender, whilst the services of all other persons are subject to tax. Article 135(1)(b) of the VAT Directive is therefore not applicable to the services provided by A.

Article 135(1)(c) of the VAT Directive – Assumption of (inter alia) securities and guarantees

The General Court clarifies that the management of loans for the purchaser (in this case, B) cannot, as such, be classified as any dealings in credit guarantees or any other security for money. Furthermore, the management of loans is expressly mentioned in Article 135(1)(b) of the VAT Directive. The restriction in this provision, whereby loan management is VAT-exempt only if carried out by the current lender, would have no practical effect if the cases not covered by this provision were subsumed under point (c). Consequently, this VAT exemption is also inapplicable.

Article 135(1)(d) of the VAT Directive – Transactions relating to receivables

According to the case law of the ECJ, this provision is applicable only to financial transactions involving a transfer of money. There must be an actual or potential transfer of ownership of money, or the specific and essential functions of such a transfer must be fulfilled. However, there is no evidence of this in the present case. Furthermore, the argument that the restriction in Article 135(1)(b) of the VAT Directive must not be circumvented also applies here.

Consequently, the credit management service provided by A to B is therefore taxable.

Analysis

The tax exemption for loan administration has had an eventful history in Germany. Until the end of 1995, loan administration was VAT-exempt even when carried out by parties other than the lender. With effect from 1 January 1996, § 4(8)(a) of the Value Added Tax Act (UStG) was amended to provide that the granting and brokering of loans are VAT exempt, except for the administration of loans and loan collateral on behalf of and for the account of third parties. The explanatory memorandum to the Act states that administration by the lender remains VAT-exempt. However, this does not require an explicit provision, as the administration of loans is an ancillary service to the granting of the loan if the party providing the administration is the same as the party granting the loan. The exception was later removed entirely from Section 4(8) of the UStG. The Future Financing Act was intended to extend the exemption to the administration of loans and loan collateral by lenders in 2024, but this proposal was not implemented. At present, there is no explicit tax exemption for the administration of loans in Section 4(8) of the German Value Added Tax Act (UStG). As Article 135(1)(b) of the VAT Directive is worded in concrete terms and leaves Member States no discretion in its implementation, businesses may rely on it directly.

 Autorin: Nadia Schulte