Remuneration for making funds available using promissory note VAT exempt?
In judgment C 801/19 FRANCK, the Court of Justice of the European Union (CJEU) held that remuneration for the transfer of funds provided by a factoring company to a debtor is, from a VAT perspective, a transaction in securities, therefore exempt from VAT without the right to deduct.
The case involved three Croatian entities:
- FRANCK (a taxable person), a company engaged in the processing of tea and coffee
- a factoring company
- a debtor of the factoring company, a Croatian retail chain.
The factoring company’s debtor was in a situation where, under Croatian banking regulations, they were unable to borrow funds from common financial institutions. Because of their indebtedness, they could also no longer use the services of the factoring company. They therefore decided to issue a promissory note/ bill of exchange which had been transferred by FRANCK to a factoring company, whereby FRANCK became the debtor’s guarantor for the payment of the promissory note/bill of exchange to the factoring company on its due date.
Upon the transfer of the promissory note, the factoring company provided funds to FRANCK, who subsequently credited them to the debtor, while withdrawing 1% as remuneration. It was this remuneration that became the subject of the VAT dispute: FRANCK considered it a VAT exempt transaction relating to the granting of credit; however, the Croatian tax administration considered it a taxable transaction relating to debt collection.
The CJEU first reiterated the principles governing VAT exempt financial transactions. The basic rule is that exempt transactions are defined in terms of the nature of the services provided and not in terms of the person supplying or receiving the service. It is therefore irrelevant whether the financial service is provided by a financial institution or a non-financial entity. The CJEU further stated that the promissory notes/bills of exchange issued by the debtor were 'negotiable instruments' as they contained the debtor’s obligation to pay a specific amount to the holder of the promissory note/bill of exchange on its due date. In this case, it was irrelevant that the funds were reimbursed not to FRANCK, but to the factoring company.
To conclude the judgment, the CJEU pointed out that the fact that the transaction aimed to circumvent Croatian banking regulations prohibiting banks from lending to companies with such level of indebtedness was irrelevant for the VAT treatment of the situation. The CJEU also rejected the tax administrator's arguments that the transaction constituted a debt collection or brokering, as the main purpose of the transaction was to satisfy the debtor's capital needs. According to the CJEU, the remuneration for transferring funds to the debtor was, for VAT purposes, a transactions in securities, i.e. an exempt transaction without the right to deduct.