When is the management of loans subject to VAT?

Facts of the case

• A, a Finnish financial institution, originated mortgage loans that were subsequently transferred to another entity wholly owned by A as its sole shareholder. Although the rights relating to the loans were transferred to B, A continued to administer the loans on B’s behalf, including managing customer relationships, collecting repayments, restructuring loans and handling collateral. In consideration for those services, A charged B the administration costs incurred plus a profit margin.
• In a binding advance tax ruling, the Finnish Central Tax Board considered that both the transfer of the loans and the loan administration services supplied by the original lender were exempt from VAT, whereas debt collection services were subject to VAT. That interpretation was subsequently challenged, raising the question of whether loan administration services supplied after the transfer of the loans could still be regarded as the “management of credit by the person granting it” within the meaning of Article 135(1)(b) of Council Directive 2006/112/EC (the “VAT Directive”).
• The question referred to the Court concerned the VAT treatment of loan administration services where the underlying receivables have been assigned to another entity but continue to be administered by the original lender and, in particular, whether such services may benefit from the VAT exemptions provided for in Article 135(1)(b) to (d) of the VAT Directive.

The Court’s arguments

• The Court was first asked to determine whether the exemption laid down in Article 135(1)(b) of the VAT Directive for the management of credit also applies where those services are supplied by the person that originally granted the credit and continues to manage it for consideration after its assignment.
• In that regard, the Court noted differences between the various language versions of the VAT Directive. Certain language versions suggest that the exemption applies to the person who originally granted the credit, whereas others, including the English version, could be interpreted as making the status of creditor the relevant factor, potentially allowing the exemption to apply to a person that acquires the receivables by way of assignment.
• Considering those differences, the Court examined the provision in its legislative and contextual framework. It concluded that the concept of “management of credit by the person granting it” must be interpreted by reference to the legal relationship between the holder of the claim and the debtor. Consequently, once the receivables have been assigned, the administration services supplied by the original lender to the assignee constitute separate services supplied for consideration to the latter and no longer fall within the scope of the VAT exemption. Such services are therefore subject to VAT.
• The Court further clarified that the services supplied by A to B could not benefit from any of the other exemptions provided for in Article 135 (1) of the VAT Directive, namely those applicable to credit guarantees and transfers of funds.
• In particular, the Court held that loan administration services cannot be reclassified as transactions concerning guarantees merely because the underlying loans serve as collateral for bonds issued by the assignee. Accordingly, the exemption under Article 135(1)(c) does not apply, since, from an objective perspective, the services supplied consist of managing loans for the benefit of their purchaser.
• Finally, the Court held that the exemption under Article 135(1)(d) of the VAT Directive is likewise inapplicable to the loan administration services at issue, as those services do not involve the transfer of ownership of funds and do not perform the specific and essential functions of such a transfer, which is the subject matter of that exemption.
• The Court therefore concluded that applying the exemptions provided for in Article 135(1)(c) and (d) to loan administration services would unduly extend the scope of the exemption for the management of credit and deprive the conditions laid down in Article 135(1)(b) of their practical effect.

Court’s decision and implications

• The General Court of the European Union held that loan administration services supplied by the original lender after the assignment of receivables constitute taxable services and cannot benefit from any of the exemptions provided for under Article 135(1)(b) to (d) of the VAT Directive.
• The judgment confirms a restrictive interpretation of VAT exemptions applicable to financial services, establishing that loan administration services supplied by the original lender following the transfer of receivables to another entity do not qualify for the VAT exemption applicable to the management of credit. Financial institutions involved in loan portfolio transfers should therefore carefully assess the VAT treatment of services rendered after the assignment, as well as the potential VAT cost implications arising from such structures.