History
9.6.2016
Value Added Taxation of Factoring – Case Law Guides Interpretation
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When the current Value Added Tax Act was being drafted in 1993—before Finland joined the EU—the reasoning of the Government proposal (HE 88/93) stated that the tax-exempt status of financial services also applied to the financing of invoice receivables formed in business operations, i.e. factoring.
Finland joined the EU in 1995, which brought Finland into the scope of new Europe-wide regulation. In 2003, the Court of Justice of the European Union (CJEU) issued what has been called the MKG decision (C-305/01 Finanzamt Groß-Gerau v MKG-Kraftfahrzeuge-Factory GmbH), which states that factoring in which the service provider purchases receivables and charges its client a fee cannot be deemed a VAT-exempt financial service in the meaning of the VAT Directive, but must be deemed a collection service that is subject to tax. Despite the MKG decision, Finnish tax practice considered factoring to be a tax-exempt financial service until 2010, when the Helsinki Administrative Court invoked the MKG decision when ruling that a company purchasing receivables was offering a collection service that was subject to tax (Helsinki Administrative Court 23 December 2010 10/173/1). A final decision in the matter was issued by the Supreme Administrative Court in decision KHO 2013:129, which referred to the VAT Directive and CJEU case law when holding that factoring must be treated in Finland as a collection service that is subject to tax rather than a tax-exempt financial service.
Unfortunately, the Finnish Tax Administration has not issued sorely needed general instructions for the VAT treatment of factoring following the Supreme Administrative Court’s decision. However, a few recent final decisions of the Central Tax Board and the Supreme Administrative Court provide some guidelines. These decisions are discussed below.
Paid or Unpaid Service?
Only paid services fall within the scope of value added taxation. If no payment is charged to the client, no VAT is applied.
After the MKG decision, the CJEU has dealt with the tax status of factoring services in its 2011 decision in the GFKL Financial Services case (C-93/2010 Finanzamt Essen-NordOst v GFKL Financial Services AG). In the case in question, a company purchased receivables at a fair value that was below their nominal value. The CJEU held that the difference between the nominal value and fair value was not payment for the service carried out by the company, and the company did not receive any other fees from its client that were separately charged or deducted from the purchase price of the receivables. This being the case, the CJEU did not consider this to be a paid service that would fall within the scope of value added taxation.
In Finland, the Supreme Administrative Court has ruled on unpaid services in decision KHO 2014:191. In the case in question, a company purchased a receivable from its client, and when collection measures proved successful, paid the client a certain percentage of the collected amount. As the amount paid to the client was determined after the fact and was a portion of the collected amount, the client was not deemed to have sold the receivables without payment in the manner referred to in the GFKL Financial services decision. The service was deemed to be a collection service subject to tax.
Taxation of Fees and Payments
In decision KVL 9/2015, the Central Tax Board deemed that it is possible to divide the purchase of receivables into tax-exempt financial services and taxliable collection services. In the case in question, the interest calculated on the capital was deemed payment for tax-exempt financial services, while other fees and payments charged to the client were deemed tax-liable.
On the other hand, Central Tax Board decision KVL 28/2015 found that when a company bought contract receivables from its client related to the client’s construction business, all of the fees and payments collected from the client, (interest, commissions on credit and management charges) were payment for tax-exempt granting of credit and in no part constituted tax-liable collection services. The debtor in some of the receivables purchased by the company were fully owned subsidiaries of the construction company, and in some of the construction developments, the construction company sold the development to investors, typically before beginning construction. According to the decision, the primary purpose of the arrangement was to finance the construction company’s working capital for the duration of the construction contract.
The latest published case is Supreme Administrative Court decision 9.3.2016/801, which concerned the value added taxation of collection fees charged to a debtor by a company offering factoring services. In the case in question, the company engaged in factoring offered its clients both a receivable purchase service in which the credit risk was transferred to the company and a financing service in which the credit risk remained with the company’s client. The Supreme Administrative Court ruled that, when the question with respect to purchased receivables was of the collection of the company’s own receivables, the collection fee charged to the debtor was not deemed to be payment for the service sold by the company to its client or to the debtor, rather the collection fee fell outside the scope of VAT, and no VAT was payable on it. With respect to the receivable financing service, the Supreme Administrative Court ruled that the part of the collection fee that remained with the company based on the agreement between the company and its client was to be considered the basis for VAT to be paid for collection services, whereas the portion that the company paid on to its clients was not subject to VAT.
Conclusions
If a service provider purchases a receivable at its fair price and does not charge any separate compensation to its client, case law holds that this is not a paid service subject to tax. In other circumstances, it is important to determine how fees and payments charged to clients and/or debtors will be treated in value added taxation.
The value added taxation of paid factoring services depends on, first, how the payments charged for the service are defined. In case law, invoice-specific handling fees and management fees, credit fees, fixed monthly and yearly compensation and a percentage fee based on the amount of the receivable or the collected amount have all been considered payment for tax-liable collection services. In contrast, interest, commissions on credit and case-specific management fees have been considered compensation for tax-exempt granting of credit. Collection fees charged to debtors for the collection of purchased receivables have been considered payments that are similar to compensation for damage and that are not subject to tax. Secondly, it is worth noting that, even if a factoring service is primarily considered a tax-liable collection service, the purchase of receivables sold for the purpose of financing business operations can, exceptionally, fulfil the criteria for a tax-exempt financing service, such as in case KVL 28/2015).
Companies engaging in factoring would be well advised to determine their own situation and that of their clients based on the precedents described above, and if necessary confirm the VAT treatment of their own business by applying for a preliminary ruling from the Finnish Tax Administration or the Central Tax Board.
For more information, please contact:
Jenni Parviainen
Leena Romppainen
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