Factoring commissions and arrangement fees are subject to VAT
The Court of Justice of the European Union (CJEU) has confirmed that factoring services, whether in the form of the sale of debts or financing secured by a pledge of debts, constitute taxable supplies. Both commissions for providing financing and arrangement fees are consideration for debt collection and management services. They therefore do not fall under financial services and thus cannot be exempt from VAT.
In the case in question (C-232/24), a Finnish factoring company offered two models:
- invoice factoring, whereby the factoring company provides financing and debts are used as a security – the risk of non-payment is borne by the customer, and
- trade factoring, whereby debts are sold to the factoring company – the risk is transferred to the factoring company.
In both cases, it involved uncontested and not yet due debts for which customers received immediate funds. When arranging factoring, the customers paid, among other things, an arrangement fee and a commission for the provision of financing, calculated as a percentage of each debt according to its risk level.
The CJEU confirmed that both trade factoring and invoice factoring constitute the provision of a service for consideration that is subject to VAT. The main purpose of factoring (regardless of its form) is the recovery and collection of third-party debts.
The factoring company therefore provides their customers with a service consisting in relieving them of the need to recover debts and bear the risk of non-payment. For this service, the factoring company receives remuneration, and its amount depends on the risk associated with the debt and the customer's credit rating. Debt collection and recovery services do not fall within the scope of financial activities exempt from VAT and are therefore taxable.
The CJEU examined whether the commission for providing financing and arrangement fees can be considered consideration for a single debt collection service, which is subject to VAT, or whether they can be considered, at least in part, remuneration for the granting of credit, which is a service exempt from VAT.
The CJEU stated that, from the perspective of both the factor and the customer, factoring service is a single and indivisible supply with the purpose to transfer the recovery and collection of debts from the customer to the factoring company. The commissions and arrangement fees paid by the customer constitute consideration for this single supply and are therefore subject to VAT. Although in invoice factoring the factoring company provides the customer with funds against the pledge over debts, the main purpose remains the recovery and collection of debt and not the granting of credit.