EU General Court addresses VAT exemption for loan management
Does a VAT exemption apply where a credit provider has sold loans to another person but has retained their management and charges a fee for that? According to the General Court of the EU, it does not. Since the original provider is no longer in the position of creditor, this is not a financial service consisting of credit management which is exempt from VAT under the VAT Directive.
In the case at hand, a Finnish parent company granted mortgage loans, which it subsequently sold to its subsidiary at market price (i.e. at a value corresponding to the outstanding principal and interest). On the date of sale, the subsidiary acquired all rights and obligations relating to the loans. However, since the subsidiary did not normally grant or manage loans itself, it was agreed that the parent company would continue to manage the loans, for consideration.
The loan management mainly comprised ensuring customer services, calculating instalments, interest and fees, making various changes to the loans and, where applicable, providing collection services. The content of these services was therefore effectively the same as if the parent company had retained the loans.
The directive on the common system of VAT provides, among other things, that financial services consisting of the management of credit by the person granting it is exempt from VAT. The General Court of the EU recalled that the terms used to define exemptions from VAT constitute an exception to the general rule of taxation and must therefore be interpreted strictly, and in line with the objectives pursued by those exemptions and the principle of fiscal neutrality.
According to the General Court of the EU, the purpose of the exemption is to exempt all supplies provided as part of the credit relationship between the creditor and the debtor to prevent increasing the cost of consumer credit. This indicates that the exemption primarily concerns supplies between the credit provider and the debtor and does not cover services provided outside that relationship.
In the case before the court, the parent company transferred its receivables to the subsidiary. The management of the loans was no longer part of the original legal relationship that gave rise to the right to VAT exemption, although it continued to be carried out by the original creditor; the activity therefore constituted a supply of services for consideration provided directly to the subsidiary, rather than to the debtors.
On these grounds, the General Court held that the VAT exemption does not apply to loan management carried out by the original creditor who granted the loans and subsequently transferred them to a third-party.
The General Court further held that the management of loans by the parent company could not be exempt as dealings in credit guarantees or any other security for money or as transactions involving transfers of receivables.
The decision has practical implications for financial institutions and other entities that continue to manage assigned loans: according to the General Court of the EU, these services must be treated as taxable supplies.