VAT treatment of sub-participation agreements
The Court of Justice of the European Union (CJEU) has dealt with the question whether sub-participation agreements, whereby a creditor under a credit agreement (a lender) transfers the credit risk to a third party, are covered by the exemption from VAT on granting, negotiating and managing credits.
In a sub-participation agreement, the lender transfers their risks arising from the credit agreement to a third party, while the respective loan receivable remains on their balance sheet. The sub-participant either provides the lender with funds, or just shares the risk and only provides the funds to the lender when the borrower defaults. The borrower is not a party to the sub-participation agreement and if they fail to meet their obligations, the sub-participant is not entitled to a refund of the funds provided to the lender.
In case C-250/21, the CJEU dealt with the VAT treatment of a sub-participation whereby a bank covered their risk from a credit agreement. When granting a credit to the borrower, the bank at the same time concluded a sub-participation agreement with an investment fund. Under this agreement, the fund provided the bank with funds corresponding to a part of the credit granted, and the bank undertook to transfer to the fund the collected instalments that were paid to it by the borrower over the term of the credit agreement. The point of dispute was the VAT treatment of the consideration received by the investment fund (the difference between the amount paid to the bank upon entering into the sub-participation agreement and the received instalments). The question was whether that service fell within the scope of 'granting and negotiating credit' and could thus be exempt from VAT. The Advocate General believed the service did not constitute a granting of credit, but she did not exclude its exemption from VAT: instead, she suggested that the transaction might be exempt under Article 135(f) of the VAT Directive.
The CJEU confirmed that it was a case of granting credit: in its opinion, granting of credit consists, inter alia, in the provision of capital against remuneration, which a sub-participation agreement meets. Also, the sub-participant bears the credit risk, and it is irrelevant to the classification of a sub-participation agreement whether the credit risk stems from the default of the borrower or from the insolvency of the lender. The fact that the sub-participant has no legal remedy against the lender in the event of default by the borrower is also irrelevant. The CJEU thus confirmed that sub-participation is exempt from VAT.