Change in VAT relating to the realisation of security
Already signed by the president, an amendment to the VAT Act introduces a considerable change for banks and other VAT payers who secure the future payment of their receivables with movable and immovable property. According to the new amendment, likely to become effective from 1 July, the realisation of these types of security will be subject to the reverse-charge mechanism. The amendment gives rise to some uncertainty, which the General Financial Directorate’s information currently in preparation should hopefully remove.
The amendment to the VAT Act introduces the application of the reverse-charge mechanism on the supply of goods provided as security by one taxable person to another when realising this security. The legislators’ intention is to improve the collection of VAT; it can be expected that insolvent debtors who do not meet their secured obligations will not also have sufficient funds to pay related VAT. Similarly as in the EU VAT Directive, the amendment uses the term security without providing a closer definition. The GFD’s information under preparation clarifies that the new regime will primarily apply to the sale of the object of the securing transfer of an ownership title or a pledge to a third person.
The GFD’s information confirms the existing approach that no taxable supply arises when a pledge is established or a securing transfer of a title is contracted. The taxable supply arises once the object of the security is realised (sold). And the security realisation does not result in only one supply but two at the same time: a taxable supply occurs between the debtor and the creditor (usually a bank) and, simultaneously, between the creditor and a third party. The application of VAT on the delivery of the object of security to a third person does not change at all: this supply continues to be subject to a VAT regime depending on the type of transaction in compliance with general VAT rules. But new rules govern the supply between the debtor and the creditor, prescribing the application of the reverse-charge mechanism. The debtor will have to issue a tax document stating that VAT will be paid by the customer. The VAT base will always be the price for which the creditor sells the object of security to a third party, irrespective of the amount of outstanding debt. A potential difference between proceeds from the realised security and outstanding debt will be refunded to the debtor and the refund will not be subject to VAT. The creditor, typically a bank, will report and pay output VAT and, simultaneously, will be entitled to VAT deduction under standard conditions, i.e. if the delivery to a third person is connected with the entitlement to deduct VAT.
The above VAT regime will only apply where the general conditions for the application of the local reverse-charge mechanism are met. Above all, both the debtor and the creditor must be VAT payers and the object of security must be goods pursuant to the VAT Act and not, for example, financial guarantees or guarantees in form of securities.
The GFD’s commented draft information is not yet final. The draft does not deal with certain issues; for example, the tax regime of lapsable pledges or situations where the object of security is not sold to a third person but the creditor decides to keep it.