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CJEU: Leases with option to purchase considered delivery of goods?

There are various forms of leases from a tax perspective. For VAT, the crucial question is whether, after the end of the lease term, the ownership title to a leased asset is automatically transferred from the lessor to the lessee. If this is the case, such a lease is considered the delivery of goods and thus subject to VAT on a one-off basis upon delivery. If not, it is regarded as a service. For leases with the option to purchase where the transfer of the title to a leased asset is only one of a number of options, VAT is paid on each individual lease instalment. In the Court of Justice of the EU’s opinion, the existence of a mere option to buy does not suffice. Other criteria must be met to treat a lease as the provision of services.

The CJEU evaluated various options of how the British representation of Mercedes Benz had been providing cars. On a general level, the court at first confirmed the existing treatment. If a lease contract contains a provision on the transfer of the title to a leased asset and, simultaneously, in the normal course of events, the title to a leased asset is automatically transferred at the end of the lease term, such a lease is regarded as the delivery of goods at the date of delivery. If the transfer of the title is not automatic and is only one of the options provided to lessees, the transaction must be treated as the provision of services.
 
But, according to the CJEU, there is more to evaluate: contracts containing an option to purchase a leased asset must also be treated as finance lease agreements (meaning the delivery of goods) if it can be inferred from the financial terms of the contract that exercising the option appears to be the only economically rational choice that the lessee will be able to make at the appropriate time if the contract is performed for its full term.  In other words, the CJEU believes that:
 
  • f lease instalments paid during the course of an operating lease correspond to the market value of a leased asset and  
  • if a customer does not have to pay a significant amount for using the option to purchase a leased asset, 
the lease agreement shall be treated as the delivery of goods and not the provision of services at the time the  leased asset is delivered.
 
Before amendments to the VAT Act harmonising Czech regulations with the EU directive came in to effect, under the Czech VAT Act, a lease contract had to explicitly specify the lessee’s obligation to acquire the respective goods if the lease contract was to be treated as a delivery of goods. Currently, it is sufficient to agree in the lease contract that the ownership title to a leased asset will be transferred to be able to treat such a lease as the delivery of goods. The potential impact of the CJEU’s decision in the Mercedes Benz case will therefore have to be considered on an individual basis, taking into account the specifics of the products at issue.